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PRELIMINARY  REPORT  OF  THE  COMAIITTKE  AP- 
POINTED BY  THE  NATIONAL  TAX  ASSOCIATION 
TO  PREPARE  A  FDAN  OF  A  MODEL  SYSTEM 
OF  STATE  AND  LOCAL  TAXATION. 

Submitted  to  the  Twelfth  Annual  Conference  held  under  the  auspices  of 
the  National  Tax  Association,  at  St.  Louis,  November  12-15,  1918. 

I.  Introduction. 

II.  The  principles  upon  which  a  model  system  of  state  and 
local  taxation  should  be  based. 

III.  The  proposed  personal  income  tax. 

IV.  The  proposed  property  tax. 
V.  The  proposed  business  tax. 

VI.  Summary  of  the  proposed  system  of  taxation. 
VII.  Tax  administration. 
VIII.  The  inheritance  tax. 
IX.  Taxes  upon  consumption. 
X.  The  separation  of  state  and  local  revenue^ 
XI.  Amendment  of  state  constitutions. 


I.  Introduction 

Section  1.  At  the  conference  held  at  Atlanta  in  November, 
1917,  under  the  auspices  of  the  National  Tax  Association,  the 
committee  appointed  by  the  Association  to  prepare  a  plan  for 
a  model  system  of  state  and  local  taxation  submitted  its  first 
report.  The  committee  was  able  to  announce  that  it  had 
reached  a  general  agreement  concerning  the  principles  upon 
which  a  uniform  system  of  state  and  local  taxation  should  be 
based,  and  expressed  the  opinion  that,  if  further  conferences 
of  its  members  could  be  arranged,  it  would  be  possible  to  reach 
an  agreement  concerning  the  details  of  the  proposed  system. 
Following  this  report,  the  executive  committee  of  the  Tax 
Association  authorized  the  holding  of  such  a  meeting,  and 
accordingly  the  committee  upon  a  model  tax  system  met  at 

M10833 


..  . 


tiJ 2  3  «: 

2  //s 

Pass  Christian,  Mississippi,  during  the  week  extending  from 
January  21  'to, January  27,  1918. 

There  were  present  at  the  meeting  Messrs.  Bullock,  Gallo- 
way,  Howe,  Link,  Lord,  Tarbet,  and  Page,  and  also,  by  special 
invitation  of  the  committee,  Mr.  A.  E.  Holcomb,  the  Treasurer 
of  the  National  Tax  Association.  Three  members  of  the  com- 
mittee, Messrs.  Adams,  Mills,  and  Rearick,  were  unable  to 
attend  the  meeting ;  Messrs.  Adams  and  Rearick  because  they 
were  prevented  by  the  pressure  of  other  duties,  and  Captain 
Mills  because  he  had  gone  to  France.  Messrs.  Adams  and 
Rearick,  however,  were  fully  informed  about  the  progress  of 
the  committee's  deliberations,  and  have  lent  their  valuable 
criticism  and  counsel,  so  that  the  report  now  submitted  has 
received  the  careful  consideration  of  all  the  members  of  the 
committee  except  Captain  Mills. 

Following  the  meeting  at  Pass  Christian,  the  chairman  of 
the  committee  prepared  a  tentative  draft  of  a  report  based 
upon  the  votes  taken  by  the  committee,  and  this  draft  was 
submitted  in  July  to  all  of  the  members  of  the  committee  ex- 
cept Captain  Mills.  After  securing  such  criticisms  and  sug- 
gestions as  the  other  members  had  to  offer  concerning  the  ten- 
tative draft,  the  chairman  was  able  to  prepare  a  report  which 
is  now  submitted,  with  the  approval  of  all  the  members  of  the 
committee  except  Captain  Mills,  for  the  consideration  of  the 
Twelfth  Annual  Conference  of  the  National  Tax  Association. 

Section  2.  This  report  has  been  printed  in  advance  of  the 
holding  of  the  Conference,  for  the  information  of  members  of 
the  Tax  Association  and  delegates  to  the  Conference.  It  is 
submitted  as  a  preliminary  rather  than  a  final  report,  and  is 
offered  with  a  view  to  furnishing  the  Conference  a  basis  for 
discussion. 

The  committee  realizes  that  a  general  agreement  upon  any 
plan  for  a  model  system  of  taxation  can  be  reached,  if  at  all, 
only  after  mature  consideration  by  all  interested  in  the  work 
of  the  National  Tax  Association,  and  believes  that  no  attempt 
should  be  made  to  reach  a  decision  this  year.  We  are,  there- 
fore, submitting  this  report  for  the .  considerate  judgment  of 
the  Conference  in  the  hope  and  expectation  of  deriving  great 
assistance  from  such  discussion  and  criticism  as  it  will  there 


3 

receive.  If  the  conclusions  we  have  reached  command  suffi- 
cient approval,  it  will  then  be  possible  for  this  committee,  or 
some  other  appointed  for  the  purpose,  to  prepare  in  the  fol- 
lowing year  what  may  be  considered  a  final  report.  This  is  a 
matter  in  which  haste  is  both  unnecessary  and  undesirable, 
and  one  in  which  success  can  result  only  from  a  general  con- 
sensus of  opinion  reached  after  the  fullest  and  maturest  de- 
liberation. 

Section  3.  In  further  explanation,  we  desire  to  point  out 
that  the  present  report  deals  only  with  the  general  principles 
upon  which  a  model  system  of  taxation  may  be  constructed 
and  with  the  general  framework  of  such  a  system.  Even  if 
all  necessary  details  had  been  fully  worked  out,  it  would  have 
been  undesirable  to  present  them  now,  since  they  would  inevi- 
tably have  tended,  to  some  extent,  to  divert  attention  from 
the  fundamentals  of  the  plan.  But  all  the  details  have  not 
been  worked  out,  and  could  not  be  within  the  time  the  com- 
mittee has  had  at  its  disposal.  We  have  found  that,  even  if 
the  plan  in  its  general  outlines  is  approved,  there  will  remain 
numerous  matters  that  will  require  further  consideration, 
some  of  them  by  committees  having  technical  qualifications 
which  the  members  of  the  present  committee  do  not  possess. 
We  have,  therefore,  not  attempted  to  deal  with  such  subjects, 
and  have  recommended  to  the  executive  committee  of  the  Na- 
tional Tax  Association  the  appointment  of  several  special  com- 
mittees to  report  upon  these  questions.  A  model  system  of 
state  and  local  taxation  cannot  be  devised  in  a  single  year, 
and  we  are,  therefore,  attempting  in  the  present  report  to 
provide  only  a  foundation  upon  which  future  work  can  be 
based.  We  believe,  however,  that,  if  such  a  foundation  can  be 
laid,  the  work  that  remains  will  be  greatly  facilitated  and  the 
completion  of  the  structure  need  not  be  long  deferred. 

II.  The  Principles  upon  which  A  Model  System  of  State 
and  Local  Taxation  should  be  Based 

x  Section  4.  Whatever  other  purposes  taxation  may  prop- 
erly have,  its  fundamental  purpose  is  to  provide  revenue 
which,  it  will  be  agreed,  ought  to  be  raised  as  equally,  cer- 
tainly, conveniently,  and  economically  as  possible.    Until  this 


fundamental  purpose  is  achieved,  and  the  American  states  are 
today  very  far  from  accomplishing  it,  we  shall  hardly  find  it 
worth  while  to  consider  what  other  purposes  taxation  may 
properly  have.  Therefore,  the  committee  has  confined  itself 
to  the  one  problem  of  immediate  practical  importance,  which 
is  that  of  devising  methods  by  which  the  large  revenues  now 
required  by  American  state  and  local  governments  may  be 
raised  with  the  greatest  practicable  degree  of  equality,  cer- 
tainty, convenience,  and  economy. 

Section  5.  Any  proposed  system  of  state  and  local  taxa- 
tion must,  at  the  very  outset,  recognize  certain  existing  condi- 
tions and  conform  to  certain  practical  requirements  before  it 
can  be  seriously  considered  as  a  basis  for  legislation.  These 
conditions  and  requirements  the  committee  has  had  constantly 
in  mind.     They  may  be  stated  briefly  as  follows : 

A.  The  proposed  system  must  yield  the  large  revenues  which 
our  state  and  local  governments  require  at  the  present  time, 
v  B.  It  must  be  practicable  from  an  administrative  stand- 
point, that  is,  it  must  be  capable  of  being  administered  by 
such  means  and  agencies  as  the  states  have  at  their  command 
and  can  reasonably  be  expected  to  provide. 

C.  It  must  be  adapted  to  a  country  with  a  federal  form  of 
government,  and  to  this  end  must  reconcile  the  diverse  claims 
of  our  several  states,  which  now  conflict  at  many  points  thereby 
producing  unjust  multiple  taxation  and  disregard  of  inter- 
state comity. 

D.  It  must  respect  existing  constitutional  limitations,  fed- 
eral and  state,  or  else  point  to  practicable  methods  of  consti- 
tutional amendment. 

E.  It  must  represent  as  nearly  as  possible  a  general  con- 
sensus of  opinion,  and  to  this  end  must  give  careful  consid- 
eration to  the  most  influential  body  of  opinion  developed  and 
formulated  by  the  National  Tax  Association. 

F.  It  must  not  propose  measures  wholly  foreign  to  Amer- 
ican experience  and  contrary  to  the  ideas  of  the  American 
people. 

Section  6.  Study  of  the  tax  laws  of  the  American  states 
reveals  the  fact  that  there  are  three  fundamental  principles 
which  have  been  more  or  less  clearlv  recognized  by  our  law- 


makers,  and  have  very  largely  determined  the  provisions  of 
the  enactments  now  standing  on  the  statute  books. 

The  first  is  the  principle  that  every  person  having  taxable 
ability  should  pay  some  sort  of  a  direct  personal  tax  to  the 
government  under  which  he  is  domiciled  and  from  which  he 
receives  the  personal  benefits  that  government  confers.  This 
is  most  clearly  exemplified  by  the  laws  providing  for  the  taxa- 
tion of  securities  and  credits  which  represent  in  large  part 
interests  in  tangible  property  and  business  located  in  other 
jurisdictions.  In  spite  of  the  fact  that  such  laws  may  lead  to 
unjust  double  taxation,  most  of  the  states  have  insisted  upon 
taxing  evidences  of  ownership,  upon  the  theory  that  the  own- 
ers are  within  their  jurisdiction  and  receive  from  them  certain 
personal  benefits  which  justify  the  imposition  of  a  tax.  State 
income  tax  laws  usually  proceed  upon  a  similar  principle ; 
and  the  same  may  be  said  of  the  poll  tax,  which  is  still  found 
in  many  of  the  commonwealths. 

The  second  principle  is  that  tangible  property,  by  whomso- 
ever owned,  should  be  taxed  by  the  jurisdiction  in  which  it  is 
located,  because  it  there  receives  protection  and  other  govern- 
mental benefits  and  services.  That  the  owner  is  frequently  a 
non-resident  is  not  considered  a  material  fact,  because  the 
property  must  be  protected  where  it  is  located,  and,  if  em- 
ployed in  trade,  comes  in  competition  with  similar  property 
of  residents.  This  principle,  furthermore,  has  received  the 
sanction  of  the  Supreme  Court  of  the  United  States  in  cases 
which  have  developed  the  rule  that  tangible  property  is  tax- 
able in  the  jurisdiction  within  which  it  is  located,  and  not 
elsewhere.1 

The  third  principle,  somewhat  less  clearly  and  generally 
exemplified  by  our  tax  laws  but  discernible  none  the  less,  is 
that  business  carried  on  for  profit  in  any  locality  should  be 
taxed  for  the  benefits  it  receives.  If  the  owners  of  the  busi- 
ness are  residents  of  the  state,  this  principle  need  not  be  ap- 
pealed to,  since  the  ordinary  methods  of  taxation  may  be  con- 
sidered to  provide  for  such  a  case.    If  a  considerable  amount 

i  See,  for  instance,  Union  Befrigerator  Transit  Co.  v.  KentucTcy,  199 
U.  S.  194. 


of  real  estate  and  other  tangible  property  is  employed  in  a 
business  conducted  for  the  account  of  non-residents,  again  no 
appeal  may  be  made  to  this  principle,  since  here  too  the  ordi- 
nary methods  of  taxation  may  be  considered  adequate.  But  if 
the  owners  are  non-residents,  and  the  business,  though  very 
profitable,  employs  little  or  no  property  subject  to  taxation  in 
,the  locality,  the  states,  to  an  increasing  degree,  demand  that 
some  method  shall  be  devised  for  reaching  such  business  enter- 
prises. This  tendency  is  exemplified  in  the  taxation  of  cor- 
porate franchises  in  California  and  some  other  states,  in  the 
taxes  imposed  on  incomes  in  Wisconsin  and  some  other  com- 
monwealths, and  in  such  laws  as  that  enacted  by  Louisiana 
taxing  non-residents  upon  credits  arising  from  business  done 
within  that  state.  It  finds,  further,  an  even  more  general  ex- 
pression in  the  numerous  business  taxes,  usually  in  the  form 
of  licenses,  which  are  found  in  many  states,  particularly  in 
the  South. 

Whatever  one  may  think  of  any  or  all  of  these  principles, 
the  fact  remains  that  they  undoubtedly  represent  hard  facts 
which  any  new  system  of  taxation  must  take  into  account. 
That  they  are  not  in  many  cases  logically  and  consistently 
applied,  admits  of  no  doubt ;  that  they  sometimes  lead  to  con- 
fusion and  involve  unjust  double  taxation  and  disregard  of 
interstate  comity,  cannot  be  questioned.  But  the  committee 
believes  that  there  is  merit  in  each  of  these  principles,  even 
though  they  have  been  frequently  misapplied;  and  is  satis- 
fied that  the  laws  in  which  the  principles  are  embodied  will 
not  be  changed  except  to  give  place  to  statutes  that  provide 
fairer  and  more  logical  methods  of  carrying  the  principles  into 
effect. 

The  problems  we  here  encounter  have  not  arisen  by  chance, 
or  as  a  result  of  mere  ignorance  and  inexperience.  They  re- 
sult from  claims  which  the  states  assert  in  pursuance  of  what 
they  consider  their  legitimate  interests  in  the  vitally  impor- 
tant matter  of  taxation.  At  this  point,  indeed,  we  get  to  the 
very  heart  of  the  most  difficult  problem  encountered  in  devis- 
ing a  logical  plan  of  taxation  in  a  country  having  a  federal 
form  of  government,  that  is,  the  adjustment  of  the  conflicting 
claims  of  independent   taxing  authorities.     The  committee. 


*£ 


therefore,  has  determined  to  make  this  problem  its  chief  point 
of  attack  upon  the  entire  subject  referred  to  its  consideration. 

Section  7.  Mature  reflection  has  brought  the  commit- 
tee to  the  conclusion  that  the  conflicts  of  jurisdiction  and 
other  evils  resulting  from  tax  laws  based  upon  the  foregoing 
principles  have  not  been  due  to  inherent  defects  of  the  prin- 
ciples themselves,  but  have  arisen  from  the  illogical  and  in- 
consistent methods  by  which  the  principles  have  frequently 
been  applied.  That  every  person  should  pay  a  direct  tax  to 
the  government  under  which  he  lives,  appears  to  us  perfectly 
reasonable  and  just;  that  tangible  property  should  be  taxed 
where  located,  is  both  reasonable  and  in  every  way  expedient ;  ^ 
and  that  business  may  properly  be  taxed  in  any  jurisdiction 
where  it  is  carried  on,  seems  to  admit  of  no  serious  doubt. 
Moreover,  we  find  in  the  tax  laws  of  other  countries  many 
examples  of  explicit  recognition  of  all  of  these  principles ;  so 
that  we  must  conclude  that  both  reason  and  experience  con- 
firm the  underlying  theories  upon  which  the  American  states 
have  based  these  provisions  of  their  tax  laws. 

The  trouble  has  been  that  the  states  have  not  applied  logi- 
cally and  consistently  the  principles  upon  which  they  have  un- 
dertaken to  act.  Under  the  system  of  the  general  property  tax, 
it  was  practically  impossible  for  them  to  do  so.  They  naturally 
and  properly  taxed  tangible  property  within  their  jurisdic- 
tions on  the  theory  that  such  property  ought  to  be  taxed  at  its 
situs,  and  then  they  sought  to  tax  intangible  property  repre- 
senting interests  in  tangible  property  already  taxed  elsewhere, 
on  the  theory  that  such  intangible  property  ought  to  be  taxed 
at  the  domicile  of  the  owner.  By  so  doing,  they  imposed  but 
one  tax  on  property  owned  by  persons  residing  in  the  state 
where  the  property  was  situated,  and  imposed  two  taxes  upon 
a  great  deal  of  property  the  interests  of  which  were  repre- 
sented by  securities  owned  by  persons  whose  domiciles  were 
not  in  the  state  where  the  tangible  property  had  its  situs.2 

2  Double  taxation  sometimes  occurs,  of  course,  when  the  persons  having 
an  interest  in  the  property  live  in  the  state  where  it  is  situated,  as  in  the 
case  of  mortgages  and  corporation  bonds.  No  attempt  is  made  at  this 
point  to  consider  all  possible  eases  of  unjust  double  taxation,  although 
the  plan  we  propose  provides  a  remedy  for  them. 


8 

In  each  case  the  underlying  theory  was  sound,  but  the  method 
of  application  resulted  in  unjust  double  taxation  of  interstate 
investments.  ^  The  only  solution  under  the  general  property 
tax  would  be  an  agreement  between  states  by  which  one  tax 
would  be  levied,  presumably  at  the  situs  of  the  property,  and 
the  proceeds  thereof  would  be  divided  in  equitable  proportions 
between  the  state  where  the  property  had  its  situs  and  that  in 
which  the  owner  was  domiciled.  But  such  an  agreement,  be- 
sides presenting  administrative  difficulties,  would  have  been 
practically  impossible  to  secure ;  and  therefore  unjust  double 
taxation  has  been  tolerated  because  the  only  practicable  alter- 
native seemed  to  be  the  surrender  of  a  claim  which  was  in 
itself  just. 

In  the  attempts  of  the  states  to  make  property  or  income 
taxes  apply  to  all  kinds  of  business  carried  on  within  their 
jurisdiction,  similar  conditions  obtain.  Assuming  that  all 
such  business  ought  to  be  taxed,  it  is  nevertheless  true  that  it 
ought  not  to  be  taxed  by  a  method  which  imposes  two  taxes 
upon  some  enterprises  and  only  one  tax  upon  others.  The 
states  of  domicile  naturally  decline  to  forego  all  their  claims 
with  respect  to  the  property  or  income  concerned,  because 
they  hold  that  the  owners  or  recipients  have  an  obligation 
to  the  governments  under  which  they  live;  the  states  where 
the  business  is  carried  on  with  equal  propriety  assert  their 
right  to  tax,  and  the  result  is  unjust  double  taxation.  The 
underlying  theories  of  taxation  are  correct  in  both  cases,  but 
the  method  of  application  is  seriously  defective. 

Section  8.  It  is  the  opinion  of  the  committee  that  the  only 
method  of  reconciling  these  conflicting  claims  of  the  states  is 
the  adoption  of  a  diversified  system  of  taxation  which  recog- 
nizes fully  the  three  principles  above  mentioned  and  provides 
a  method  by  which,  without  formal  agreement  among  the 
states,  these  principles  may  be  logically  and  consistently  ap- 
plied. We  propose,  therefore,  a  personal  tax  which  shall  be 
levied  consistently  upon  the  principle  of  taxing  every  one  at 
his  place  of  domicile  for  the  support  of  the  government  under 
which  he  lives ;  a  property  tax  upon  tangible  property,  levied 
objectively  where  such  property  has  its  situs  and  without 
regard  to  ownership  or  personal  conditions;  and  finally,  for 


9 

such  states  as  desire  to  tax  business,  a  business  tax  which  shall 
be  levied  upon  all  business  carried  on  within  the  jurisdiction 
of  the  authority  levying  such  tax.  By  this  method  we  believe 
it  is  possible  to  satisfy  every  legitimate  claim  of  every  state 
without  imposing  unequal  and  unjust  double  taxation  upon 
any  class  of  income,  property,  or  business.  We  propose,  in 
other  words,  nothing  more  than  to  ask  the  states  to  apply 
logically  and  consistently  the  principles  that  today  underlie 
the  greater  part  of  their  tax  laws.  By  so  doing  we  are  recom- 
mending action  along  the  line  of  least  resistance,  and  for  our 
proposals  we  find  many  precedents  in  the  legislation  of  this 
and  of  other  countries. 

Section  9.  Such  a  diversified  system  of  taxation  as  we 
recommend  will  not  only  reconcile  the  conflicting  claims  of 
the  states,  it  will  also  facilitate  greatly  a  proper  classification 
of  the  objects  upon  which  taxation  falls.  One  of  the  greatest 
evils  of  the  general  property  tax  has  been  that  it  has  been 
levied  upon  different  classes  of  property  without  regard  to 
differences  in  the  nature  and  taxable  ability  of  such  classes, 
or  to  the  different  degrees  in  which  they  benefit  from  public 
expenditure.  This  is  a  commonplace  to  all  students  of  the 
subject,  and  is  sufficiently  set  forth  in  the  publications  of  the 
National  Tax  Association.  The  Association  has  long  been 
committed  to  the  proper  classification  of  the  subjects  of  taxa- 
tion, and  the  conferences  held  under  its  auspices  have  re- 
peatedly endorsed  the  principle  of  classification.  So  far,  in- 
deed, as  the  principle  is  concerned,  we  believe  that  a  general 
agreement  upon  this  point  may  be  taken  for  granted,  and  that 
the  only  profitable  topic  for  discussion  is,  and  for  some  time 
has  been,  that  of  the  proper  method  of  classification.  We  find 
it  unnecessary,  therefore,  to  dwell  further  upon  the  need  of 
classifying  the  subjects  of  taxation. 

It  is  important,  however,  to  point  out  that  the  plan  we 
recommend  goes  far  toward  securing  a  proper  classification  of 
the  subjects  of  taxation.  The  personal  income  tax  will  reach 
every  kind  of  taxable  income,  and  will  make  it  unnecessary  to 
attempt  to  levy  any  tax  upon  intangible  property,  thus  elim- 
inating the  most  serious  difficulty  connected  with  property 
taxation.    The  property  tax  will  be  applicable  to  every  form 


10 

of  tangible  property  that  any  state  wishes  to  tax ;  and  admits 
of  being  levied  upon  such  property  uniformly,  or  of  being 
levied  under  a  proper  classification  such  as  we  shall  hereafter 
suggest.  And  finally,  the  business  tax,  since  it  will  be  levied 
purely  as  a  business  tax  and  not  as  a  part  of  a  personal  in- 
come tax  or  a  property  tax,  can  be  readily  adjusted  in  such  a 
manner  as  the  needs  of  business  and  the  situation  of  every 
state  may  require. 

Section  10.  The  plan  which  the  committee  recommends  is, 
therefore,  fundamentally  a  plan  intended  to  reconcile  the 
conflicting  interests  of  the  states,  and  to  facilitate  the  proper 
classification  of  the  subjects  of  taxation.  It  involves  nothing 
new  in  principle,  and  merely  requires  the  logical  application 
of  principles  already  recognized  by  the  tax  laws  of  many 
states.  It  will  bring  about  a  full  and  adequate  taxation  of 
income,  property,  and  business,  and  will  produce  as  much 
revenue  as  the  state  and  local  governments  can  expect  to  de- 
rive from  these  sources.  Finally,  it  encounters  no  insuper- 
able constitutional  difficulties,  and  certainly  will  require  no 
more  changes  in  state  constitutions  than  any  other  plan  that 
would  be  adequate  to  the  needs  of  the  case. 

III'.  The  Proposed  Personal  Income  Tax 

Section  11.  The  first  decision  reached  by  the  committee 
was  that  in  the  proposed  model  system  of  state  and  local  tax- 
ation there  should  be  a  personal  tax  levied  with  the  exclusive 
view  of  carrying  out  the  principle  that  every  person  having 
taxable  ability  should  pay  a  direct  tax  to  the  government 
under  which  he  is  domiciled.  There  appeared  to  be  four 
forms  of  personal  taxation  which  have  been  employed  for  this 
purpose. 

The  first  of  these  is  the  poll  tax.  It  is  evident,  however, 
from  the  nature  of  the  case  that  this  tax  would  be  utterly  in- 
adequate to  accomplish  the  object  in  view,  even  if  levied  at 
graduated  rates,  as  has  sometimes  been  done  in  other  coun- 
tries. It  would  be  so  unequal  and  so  far  inferior  to  the  other 
forms  of  personal  taxation  that  it  cannot  be  deemed  worthy  of 
serious  consideration.  Whether,  as  a  supplement  to  an  ade- 
quate system  of  personal  taxation,  it  might  be  desirable  to 


11 

retain  the  poll  tax  as  a  means  of  insuring  some  contribution 
from  people  owning  no  property  and  having  small  incomes, 
the  committee  preferred  not  to  consider  in  this  report.  It  has 
been  our  desire  to  confine  ourselves  to  main  issues,  and  not  to 
undertake  to  solve  every  minor  problem  of  taxation.  We, 
therefore,  say  nothing  about  the  poll  tax,  except  that  it  is  in- 
adequate for  the  purpose  that  we  have  in  view,  and  cannot  be 
recommended  as  an  important  element  in  any  system  of  state 
and  local  taxation. 

The  second  method  of  imposing  the  personal  tax  would  be 
to  levy  a  tax  upon  every  man's  net  fortune,  that  is,  upon  the 
total  of  his  assets  in  excess  of  his  liabilities,  without  exemption 
of  any  kind  of  asset  or  exclusion  of  any  liability.    This  would 
mean  a  general  property  tax,  but  a  net  property  tax  such  as 
is  found  in  some  countries  in  Europe.     It  would  be  a  tax 
levied  not  upon  property  as  such,  but  upon  net  fortune  as  a 
measure  of  the  citizen's  personal  liability  to  contribute  to  the 
government  under  which  he  is  domiciled.    It  would  be  entirely 
distinct  from  any  tax  that  might  be  levied  objectively  upon 
property,  as  property,  at  the  place  of  its  situs,  and  would 
have  to  be  levied  exclusively  upon  the  property  owner  at  his 
place  of  domicile.    It  would  necessarily  be  levied  at  a  mod- 
erate rate,  perhaps  $3  per  $1000,  which  would  correspond 
approximately  to  a  six  per  cent  income  tax  upon  investments 
yielding  five  per  cent.    Although  precedents  may  be  found  in 
other  countries  for  such  a  personal  tax  levied  upon  net  for- 
tunes, the  committee  has  concluded  that  it  is  not  to  be  recom- 
mended for  adoption  in  the  United  States.    Such  a  tax  would 
raise  the  difficult  constitutional  question  of  the  right  of  a  state 
to  levy  a  tax  even  upon  the  net  fortune  of  a  citizen  if  that 
fortune  included  tangible  property  located  in  another  com- 
monwealth.   It  is,  furthermore,  foreign  to  American  experi- 
ence, and  would  certainly  not  lead  us  along  the  line  of  least 
resistance.    Since  the  coming  of  the  federal  income  tax,  it  is 
obvious  that  it  is  easier  for  the  states,  and  more  convenient  for 
the  taxpayers,  to  adopt  income  rather  than  net  fortune  as  the 
measure  of  the  obligation  of  the  citizen  to  contribute  to  the 
government  under  which  he  lives. 

The  third  method  of  personal  taxation   is  what  may  be 


12 

called  a  presumptive  income  tax,  that  is,  a  tax  levied  upon 
persons  according  to  certain  external  indicia  which  are  taken 
to  be  satisfactory  measures  of  taxable  ability.  House  rent  is 
the  index  commonly  used  in  such  presumptive  income  taxes, 
and  a  tax  on  rentals  has  been  proposed  in  times  past  by  special 
commissions  in  Massachusetts  and  New  York.  Such  a  tax 
would  be  comparatively  easy  to  administer,  and  would  raise 
no  difficult  constitutional  questions.  It  would  undoubtedly  be 
better  than  an  income  tax  or  a  tax  on  net  fortunes  if  those 
taxes  were  badly  administered.  But  the  amount  that  a  citizen 
pays  for  house  rent  is  after  all  such  a  very  imperfect  and  in- 
adequate indication  of  his  income  or  fortune  that  the  com- 
mittee is  unwilling  to  recommend  it  to  any  state  in  which 
there  is  any  reasonable  expectation  that  conditions  are,  or 
may  presently  become,  favorable  for  the  introduction  of  a 
better  form  of  personal  tax.  It  appears  that  in  France,  where 
the  tax  on  rentals  has  been  in  continuous  operation  since  the 
Revolution,  there  is  so  little  correspondence  between  house 
rents  and  taxable  ability  that  in  the  greater  part  of  the  com- 
munes the  taxing  officials  disregard  to  a  greater  or  less  extent 
the  letter  of  the  law,  and  assess  people  according  to  what  they 
appear  able  to  pay.  The  committee  finds,  therefore,  that  the 
tax  on  rentals  is  not  to  be  recommended  except,  perhaps,  as  a 
last  resort  in  states  where  administrative  and  other  conditions 
are  unfavorable  to  the  introduction  of  any  better  form  of  per- 
sonal taxation. 

There  remains  a  fourth  form  of  personal  taxation,  the  per- 
sonal income  tax.  By  this  is  meant  a  tax  levied  upon  persons 
with  respect  to  their  incomes  which  are  taxed  not  objectively 
as  incomes  but  as  elements  determining  the  taxable  ability  of 
the  persons  who  receive  them.  This  tax  is  better  fitted  than 
any  other  to  carry  out  the  principle  that  every  person  having 
taxable  ability  shall  make  a  reasonable  contribution  to  the 
support  of  the  government  under  which  he  lives.  It  is  as  fair 
in  principle  as  any  tax  can  be ;  under  proper  conditions,  it  can 
be  well  administered  by  an  American  state,  as  Wisconsin  and 
Massachusetts  have  proved;  it  is  a  form  of  taxation  which 
meets  with  popular  favor  at  the  present  time,  and  therefore 
seems  to  offer  the  line  of  least  resistance.     The  committee, 


13 

therefore,  is  of  the  opinion  that  a  personal  income  tax  is  the 
best  method  of  enforcing  the  personal  obligation  of  the  citizen 
for  the  support  of  the  government  under  which  he  lives,  and 
recommends  it  as  a  constituent  part  of  a  model  system  of 
state  and  local  taxation. 

Section  12.  While  it  is  impossible  in  this  report  to  de- 
scribe the  proposed  taxes  in  every  detail,  it  is  essential  that 
the  committee  should  explain  at  least  in  broad  outlines  the 
manner  in  which  these  taxes  should  be  levied.  In  so  doing  it 
will  be  necessary  to  refer  constantly  to  the  general  principles 
previously  stated,  and  to  adjust  the  details  of  each  tax  in  such 
a  manner  as  to  enable  it  to  carry  into  effect  logically  and  con- 
sistently the  principle  upon  which  it  is  based. 

Since  the  purpose  of  the  personal  income  tax  is  to  enforce 
the  obligation  of  every  citizen  to  the  government  under  which 
lie  is  domiciled,  it  is  obvious  that  this  tax  must  be  levied  only 
upon  persons  and  in  the  states  where  they  are  domiciled.  It 
is  contrary  to  the  theory  of  the  tax  that  it  should  apply  to  the 
income  from  any  business  as  such,  or  apply  to  the  income  of 
any  property  as  such.  The  tax  should  be  levied  upon  persons 
in  respect  of  their  entire  net  incomes,  and  should  be  collected 
only  from  persons  and  at  places  where  they  are  domiciled.  It 
should  not  be  collected  from  business  concerns,  either  incor- 
porated or  unincorporated,  since  such  action  would  defeat  the 
very  purpose  of  the  tax. 

At  first  thought  this  proposal  will  doubtless  seem  objection- 
able to  many,  who  will  ask  why  a  state  should  not  tax  all  in- 
comes derived  from  business  or  property  located  within  its 
jurisdiction,  irrespective  of  whether  the  recipients  are  resi- 
dents or  non-residents.  And  if  the  personal  income  tax  were 
the  only  one  proposed,  the  objection  would  be  well  grounded. 
The  committee,  however,  is  under  the  necessity  of  reconciling 
the  conflicting  claims  of  the  states,  and  of  doing  so  in  a  man- 
ner that  will  avoid  unjust  double  and  triple  taxation  of  inter- 
state business  and  investments.  We,  therefore,  propose  as  the 
only  practicable  remedy  a  system  which  comprises  three  taxes, 
each  of  which  is  designed  to  satisfy  fully  and  fairly  the  legit- 
imate claims  of  our  several  states.  We  are  elsewhere  provid- 
ing methods  by  which  property  will  be  taxed  where  located 


/ 


14 

and  business  will  be  taxed  where  it  is  carried  on.  At  this 
point,  we  are  dealing  exclusively  with  a  personal  tax  designed 
to  enforce  the  right  of  our  states  to  tax  all  persons  domiciled 
within  their  jurisdictions;  and  we  are  merely  insisting  that, 
in  enforcing  this  clajm,  the  states  shall  act  consistently,  and 
shall  confine  personal  taxation  to  persons  and  attempt  to  levy 
it  only  at  the  place  of  domicile.  If  the  personal  income  tax  is 
levied  in  any  other  way,  it  will  simply  reproduce  and  per- 
petuate the  old  evil  of  unjust  double  taxation  of  interstate 
property  and  interstate  business. 
^  The  second  detailed  recommendation  we  have  to  make  is 
that  the  personal  income  tax  shall  be  levied  in  respect  of  the 
citizen's  entire  income  from  all  sources.  Under  existing  con- 
stitutional limitations,  of  course,  interest  upon  the  bonds  of 
the  United  States  and  the  salaries  of  federal  officials  cannot 
be  taxed  by  the  states,  but  we  recommend  that  all  other  sources 
of  income  be  subject  to  the  income  tax  without  exception  or 
qualification.  We  are  aware  that,  under  the  unreasonable 
and  unworkable  requirements  of  the  general  property  tax,  it 
has  appeared  desirable  in  times  past  to  exempt  state  and 
local  bonds  from  taxation,  to  exempt  real  estate  mortgages, 
and  to  grant  various  other  exemptions.  All  such  exemptions 
are  inconsistent  with  the  theory  of  the  tax  we  here  propose, 
and  should  be  discontinued  as  rapidly  as  the  circumstances  of 
each  case  permit.  Against  the  policy  which  led  to  these  ex- 
emptions under  the  general  property  tax  we  here  offer  no 
criticism.  But  we  are  now  dealing  with  a  tax  which  is  de- 
signed to  be  a  part  of  a  new  system  of  taxation,  and  it  is  evi- 
dent that  none  of  the  considerations  which  led  to  the  exemp- 
tions created  under  the  general  property  tax  are  applicable  to 
a  personal  income  tax  levied  upon  the  principle  we  here  ad- 
vocate. The  personal  obligation  of  the  citizen  to  contribute 
to  the  support  of  the  government  under  which  he  lives  should 
not  be  affected  by  the  form  his  investments  take,  and  to 
exempt  any  form  of  investment  can  only  bring  about  an  un- 
equal, and  therefore  an  unjust  distribution  of  this  tax.  Our 
reasoning  applies,  of  course,  to  the  exemption  which  agencies 
of  the  federal  government  now  enjoy.  But  that  is  a  matter 
which  is  beyond  the  control  of  the  states,  and  for  the  pur- 


15 

poses  of  this  report  it  will  be  considered  a  fixed  datum  which 
must  be  accepted.3 

Our  third  specific  recommendation  is  that  the  personal  in- 
come tax  should  be  levied  upon  net  income  defined  substan- 
tially as  a  good  accountant  would  determine  it.  We  submit 
no  formal  definition  at  this  time,  and  content  ourselves  with 
referring  to  the  provisions  of  the  "Wisconsin  and  the  Massa- 
chusetts income  taxes.  Our  recommendation  means  that 
operating  expenses  and  interest  on  indebtedness  must  be  de- 
ducted, but  we  wish  to  call  attention  to  the  fact  that  the  issue 
by  the  federal  government  of  large  amounts  of  bonds  which 
are  exempt  from  local  taxation  will  make  it  necessary  for  the 
states  to  limit  the  interest  deduction  to  an  amount  propor- 
tional to  the  income  which  the  taxpayer  derives  from  taxable 
sources.  This  would  mean  that  if  a  person  derives  half  of 
his  income  from  taxable  sources  and  one-half  from  tax-exempt 
federal  bonds,  he  should  be  permitted  to  deduct  but  one-half 
of  the  interest  that  he  pays  upon  his  indebtedness.  Any  other 
procedure  will  tend  to  make  the  personal  income  tax  a  farce  in 
many  cases  and  will  give  occasion  for  legitimate  complaint. 

The  fourth  recommendation  relates  to  the  exemption  of 
small  incomes.  The  committee  believes  that  the  amount  of  in- 
come exempted  from  the  personal  income  tax  should  not  ex- 
ceed $600  for  a  single  person  and  $1200  for  a  husband  and 
wife,  with  a  further  exemption  of  $200  for  each  dependent 
up  to  a  number  not  to  exceed  three.  This  would  give  us  a 
maximum  exemption  of  $1,800  for  a  family  consisting  of  hus- 
band, wife,  and  three  children  or  other  dependents.  We  rec- 
ognize, however,  that  conditions  may  well  differ  in  various 
states,  and  have  decided  to  make  no  specific  recommendations 
about  the  amount  of  the  exemptions  granted  to  persons  hav- 
ing small  incomes.    We  limit  ourselves  to  the  above  statement 

a  We  here  follow  the  view  that  has  long  prevailed  concerning  existing 
restrictions  on  the  taxing  power  of  the  states.  In  two  recent  cases  {Peck 
v.  Lowe  and  U.  S.  Glue  Co.  v.  Oak  Creek,  247  U.  S.)  the  court  has  devel- 
oped a  doctrine  which  may  justify  the  belief  that  a  net  income  tax,  levied 
upon  state  officials  along  with  all  other  persons,  with  respect  to  their  en- 
tire net  incomes,  might  not  be  held  to  be  a  tax  upon  agencies  of  the 
federal  government,  and  therefore  forbidden  by  federal  decisions. 


16 

of  the  maximum  exemptions  that  should  be  granted  and  the 
further  observation  that,  under  a  democratic  form  of  govern- 
ment, it  is  desirable  to  exempt  as  few  people  as  possible  from 
the  necessity  of  making  a  direct  personal  contribution  toward 
support  of  the  state.4  I 

Our  fifth  recommendation  is  that  the  rate  of  the  income  tax 
shall  be  the  same  for  all  kinds  of  income,  that  is,  that  it  shall 
not  be  differentiated  according  to  the  sources  from  which  in- 
come is  derived.  If  the  tax  stood  by  itself,  a  strong  argument 
could  be  made  for  imposing  a  higher  rate  upon  funded  than 
upon  unfunded  incomes.  But  the  tax  is,  in  fact,  designed  to 
be  part  of  a  system  of  taxation  in  which  there  will  be  a  tax 
upon  tangible  property.  Under  this  system  there  will  be 
heavier  taxation  of  the  sources  from  which  funded  incomes 
are  derived ;  and  there  will,  therefore,  be  little  if  any  ground 
for  attempting  to  differentiate  the  rates  of  the  personal  income 
tax.  Such  differentiation,  furthermore,  would  greatly  com- 
plicate the  administration  of  the  tax,  and  would  lead  to  numer- 
ous difficulties.  Upon  all  accounts,  therefore,  we  recommend 
that  there  shall  be  no  differentiation  of  the  rate. 

In  the  sixth  place,  we  recommend  that  the  rates  of  taxation 
shall  be  progressive,  the  progression  depending  upon  the 
amount  of  the  taxpayer's  net  income.  Concerning  the  precise 
schedule  of  rates,  we  offer  certain  general  recommendations. 
The  lowest  rate  should  not  be  less  than  one  per  cent,  and 
under  present  conditions  we  regard  it  as  inexpedient  for  any 
state  to  impose  a  rate  higher  than  six  per  cent.  The  classes 
of  taxable  income  to  which  the  various  rates  apply  need  not 
be  smaller  than  $1000,  and  probably  should  not  be  larger. 
It  results  from  what  has  been  said  that  if  the  exemption  to  a 
single  person  be  placed  at  $600,  we  would  recommend  a  tax  of 
one  per  cent  upon  any  amount  of  income  between  $600  and 
$1600 ;  a  tax  of  two  per  cent  upon  any  amount  of  income  be- 
tween $1600  and  $2600;  a  tax  of  three  per  cent  upon  any 
amount  of  income  between  $2600  and  $3600 ;  a  tax  of  four  per 
cent  upon  any  amount  of  income  between  $3600  and  $4600; 

4  For  administrative  convenience  we  recommend  that,  in  order  to  mini- 
mize the  number  of  very  small  tax  bills,  no  person  liable  to  pay  an  income 
tax  shall  be  assessed  for  less  than  $1.00. 


17 

a  tax  of  five  per  cent  upon  any  amount  of  income  between 
$4600  and  $5600 ;  and  a  tax  of  six  per  cent  upon  all  income  in 
excess  of  $5600.  We  present  these  figures  merely  for  the  pur- 
pose of  illustrating  our  preferences,  and  make  no  definite 
recommendation  except  that  the  rates  of  the  personal  income 
tax  should  be  moderate,  and  should  be,  as  nearly  as  practi- 
cable, uniform  throughout  the  United  States. 

Our  seventh  suggestion  concerns  the  administration  of  the 
proposed  tax.  No  argument  can  be  needed  by  the  National 
Tax  Association  to  support  our  recommendation  that  the  ad- 
ministration of  the  personal  income  tax  should  be  placed  in 
the  hands  of  state  officials.  This  we  regard  as  an  indispens- 
able condition  for  the  successful  operation  of  any  state  income 
tax,  and  we  should  be  disinclined  to  recommend  the  adoption 
of  an  income  tax  by  any  commonwealth  that  is  unwilling  to 
turn  over  its  administration  to  a  well  organized  and  properly 
equipped  state  department.  No  local  administration  of  an 
income  tax  has  ever  worked  well,  and  in  our  opinion  never 
can  operate  satisfactorily.  It  is  obvious,  finally,  that  a  state 
tax  commission,  or  commissioner,  is  the  proper  agent  to  ad- 
minister the  proposed  tax ;  and  we  desire  to  record  our  belief 
that  satisfactory  results  are  hardly  to  be  expected  if  the  ad- 
ministration is  turned  over  to  any  other  state  officials.  Upon 
this  whole  question  of  administration,  which  is  of  the  most 
vital  importance,  we  are  fortunate  in  being  able  to  rely  upon 
the  authority  of  the  opinions  repeatedly  expressed  by  the  con- 
ferences of  the  National  Tax  Association.  We  are  glad  also 
to  point  to  the  experience  of  Wisconsin  and  Massachusetts. 

Our  eighth  recommendation  is  that  the  personal  income  tax 
be  collected  from  taxpayers,  upon  the  basis  of  strictly  enforced 
and  controlled  returns,  and  without  any  attempt  to  collect  it 
at  the  source.  Upon  this  point  there  might  have  been  doubt 
several  years  ago.  But  the  experience  of  Wisconsin  and 
Massachusetts  shows  conclusively  that,  with  good  administra- 
tion, a  reasonable  tax  upon  incomes  can  be  collected  in  the 
manner  we  have  recommended,  with  the  general  cooperation 
of  the  taxpayers  and  with  the  minimum  amount  of  evasion. 
Collection  at  source  presents  serious  administrative  difficulties, 
imposes  unwarranted  burdens  upon  third  parties  in  respect  of 


18 

transactions  which  strictly  concern  only  the  taxpayers  and  the 
government,  and  not  infrequently  tends  to  shift  the  burden 
of  the  tax  to  the  wrong  shoulders.  What  we  seek  is  a  personal 
tax  which  shall  not  be  shifted  and  shall  bring  home  to  the  tax- 
payer, in  the  most  direct  possible  form,  his  personal  obligation 
for  the  support  of  the  government  under  which  he  lives.  Col- 
lection at  the  source  is  plainly  inconsistent  with  the  purpose 
of  such  a  tax.  We  recommend,  however,  that  in  certain  cases 
information  at  the  source  be  required  as  is  now  done  under 
the  Massachusetts  and  Wisconsin  income  taxes.  Such  infor- 
mation is  helpful  to  the  administrative  officials,  and  does  not 
alter  the  incidence  or  otherwise  affect  injuriously  the  opera- 
tion of  a  personal  income  tax. 

Section  13.  The  only  remaining  point  is  that  of  the  proper 
disposition  of  the  proceeds  of  this  tax.  So  far  as  our  general 
plan  of  taxation  is  concerned,  it  is  immaterial  whether  the 
revenue  from  the  personal  income  tax  is  retained  in  the  state 
treasury,  distributed  to  the  local  political  units,  or  divided 
between  the  state  and  local  governments.  It  is  probable,  fur- 
thermore, that  the  same  solution  may  not  be  advisable  in  every 
state.  If  the  state  should  keep  the  entire  revenue,  then  every 
section  of  the  state  would  benefit  to  the  extent  that  such  reve- 
nue might  reduce  the  direct  state  tax.  Upon  the  other  hand, 
if  the  revenue  from  the  income  tax  is  distributed  wholly  to 
the  local  units,  as  is  now  the  case  in  Massachusetts,  the  light- 
ening of  local  burdens  tends  to  reduce  the  pressure  of  the 
direct  state  tax.  It  seems  probable  that  in  most  cases  a  divi- 
sion of  the  revenue  would  be  considered  preferable;  and  in 
such  cases  we  suggest  that  the  state  governments  might  well 
retain  a  proportion  corresponding  to  the  proportion  which 
state  expenditures  bear  to  the  total  of  the  state  and  local  ex- 
penditures, and  that  the  same  principle  should  apply  in  deter- 
mining the  share  received  by  each  of  the  subordinate  political 
units.  Thus  in  case  state  expenditures  amount  to  one-fifth  of 
the  total,  county  expenditures  to  two-fifths,  and  municipal 
expenditures  to  two-fifths,  the  state  should  receive  one-fifth  of 
the  revenue  from  the  income  tax,  the  counties  two-fifths,  and 
the  municipalities  two-fifths.  Whether  distribution  to  the 
local  units  should  be  made  upon  the  basis  of  the  amount  of  tax 


19 

collected  in  each  unit,  or  whether  the  tax  should  be  distributed 
upon  some  other  basis,  is  also  immaterial  to  our  general  plan 
of  taxation.  In  states  where  domiciliary  changes  occurring 
under  the  general  property  tax  have  not  produced  an  unnat- 
ural concentration  of  wealth  in  certain  localities,  it  will  prob- 
ably be  best  to  distribute  the  revenue  according  to  the  domi- 
cile of  the  taxpayers.  But  where,  as  in  Massachusetts,  under 
the  operation  of  the  general  property  tax,  wealth  has  been 
greatly  concentrated  in  a  few  localities,  such  a  method  of 
distribution  is  obviously  impossible  and  some  other  method 
must  be  found.  In  such  a  case,  the  income  tax  revenue  might 
be  utilized  for  a  state  school  fund,  or  might  be  distributed 
among  the  localities  according  to  the  proportions  in  which 
they  are  required  to  contribute  to  the  direct  state  tax.  Since 
this  entire  question  of  distribution  must  be  so  largely  affected 
by  local  conditions,  the  committee  prefers  to  do  no  more  than 
to  offer  these  general  suggestions. 

IV.    The  Proposed  Property  Tax 

Section  14.  The  second  part  of  the  tax  system  proposed  by 
the  committee  is  a  tax  upon  tangible  property,  levied  exclu- 
sively at  the  place  where  such  property  is  located.  By  this 
means  the  several  states  will  be  able  to  satisfy  adequately  and 
fairly  their  just  claims  in  respect  of  property  enjoying  pro- 
tection and  other  benefits  under  their  laws. 

Concerning  this  tax,  it  will  be  observed,  we  recommend  that 
it  be  confined  to  tangible  property,  and  that  intangible  prop- 
erty of  all  descriptions  be  exempt  from  taxation  as  property. 
All  attempts  to  reach  such  property  under  the  general  prop- 
erty tax  have  in  the  past  proved  failures,  and  in  our  opinion, 
with  the  rates  of  taxation  now  prevailing  in  the  several  states, 
will  always  fail  to  accomplish  the  desired  end.  Moreover,  they 
necessarily  involve  a  large  amount  of  unjust  multiple  taxation 
which  we  can  see  no  way  of  avoiding  under  the  property  tax/' 

5  As  an  illustration  of  this  we  may  refer  to  the  vast  amount  of  litiga- 
tion, uncertainty,  and  injustice  resulting  from  the  attempt  to  fix  the  situs 
of  intangible  property  and  from  the  recognition  of  a  so-called  *  *  business 
situs' '  for  intangible  property  which  inevitably  brings  about  unjust 
double  taxation.  This  subject  will  be  further  alluded  to  in  our  discussion 
of  the  business  tax  which  we  think  should  remove  the  cause  of  this  diffi- 
culty. 


20 

We  believe  that  the  personal  income  tax  which  we  have  already 
recommended  will  reach  income  from  intangible  property 
fully  and  fairly  at  the  only  place  where  it  can  be  taxed  with- 
out running  the  risk  of  unjust  double  taxation,  that  is,  at  the 
domicile  of  the  recipient.  With  this  provision  made  for  de- 
riving a  fair  revenue  from  intangible  property,  it  is  obviously 
undesirable  that  the  states  should  continue  to  tax  it  as  prop- 
erty, and  we  therefore  recommend  that,  under  the  proposed 
system,  property  taxation  be  confined  exclusively  to  tangible 
property. 

Section  15.  Whether  tangible  property  should  be  taxed  at 
a  uniform  rate  or  should  be  classified  for  taxation,  is  a  ques- 
tion that  requires  careful  consideration  and  one  concerning 
which  there  may  be  difference  of  opinion.  It  is  the  judgment 
of  the  committee,  however,  that  a  distinction  should  be  drawn 
at  least  between  real  estate  and  tangible  personal  property, 
and  that  the  latter  should  receive  a  separate  classification. 
The  reasons  for  this  conclusion  are,  in  the  first  place,  the  diffi- 
culty of  enforcing  strictly  a  tax  upon  many  kinds  of  tangible 
personal  property  at  the  high  rates  of  taxation  which  under 
present  conditions  our  states  commonly  impose  and  must  con- 
tinue to  levy  upon  real  estate.  Tangible  personalty  can  be 
moved  from  one  jurisdiction  to  another,  and  it  frequently  is 
removed  if  taxation  is  considered  excessive.  Moreover,  it  does 
not  occasion  so  much  government  expenditure  as  real  estate, 
and  does  not  benefit  from  many  kinds  of  local  expenditure  to 
the  same  degree  as  the  latter.  Our  opinion  is  confirmed  by 
the  fact  that  in  a  state  like  Wisconsin  an  efficient  state  tax 
commission,  clothed  with  all  necessary  authority,  has  become 
so  impressed  with  the  difficulty  of  taxing  tangible  personalty 
at  the  same  rate  as  real  estate  that  it  has  recommended  the 
total  exemption  of  this  class  of  property.  Where  the  general 
rate  of  taxation  is  low,  the  difficulties  attending  the  taxation 
of  tangible  personal  property  may  be  less  serious ;  but,  at  the 
commonly  prevailing  rates  of  $1.50  or  $2.00  per  $100,  we  be- 
lieve that  strict  enforcement  of  a  tax  upon  tangible  personalty 
will  continue  to  be  found  most  difficult  and  even  impossible. 

In  our  opinion,  the  rate  of  taxation  upon  tangible  personal 
property  should  not  exceed  $1.00  per  $100.    At  that  rate  it  is 


21 

probable  that,  with  suitable  provision  for  enforcement,  the  tax 
will  yield  not  less  than  is  now  collected  at  the  higher  rates 
usually  applied  to  property  in  general,  and  may  even  yield 
something  more.  Experience  may  show  that  even  a  lower  rate, 
perhaps  $0.80  per  $100,  may  be  preferable;  only  experience 
can  determine  this  point.  For  the  present,  we  content  our- 
selves with  recommending  a  separate  classification  for  tangible 
personalty  with  a  maximum  rate  of  $1.00  per  $100.6 

It  is  sometimes  suggested  that  the  remedy  for  excessive 
rates  of  taxation  upon  tangible  personalty  is  not  a  separate 
classification  for  such  property  but  effective  provision  for  a 
full  valuation  of  all  property.  With  such  full  valuation,  it  is 
thought,  the  rate  of  taxation  upon  all  property,  real  and  per- 
sonal, will  be  reduced  to  some  such  figure  as  is  here  recom- 
mended for  tangible  personalty.  In  a  few  states,  like  West 
Virginia  and  Kansas,  this  result  was  actually  secured  some 
years  ago  by  thoroughgoing  revaluations;  but,  with  the  pres- 
ent high  level  of  public  expenditure,  it  cannot  be  attained  in 
the  average  American  state,  and  today  is  hardly  to  be  ex- 
pected anywhere.  We  therefore  see  no  practicable  course  ex- 
cept to  recommend  a  separate  classification  for  tangible  per- 
sonalty, and  this  we  do  in  order  to  make  our  tax  laws  enforc- 
ible  and  to  create  conditions  under  which  all  taxable  property 
shall  be  valued  strictly  in  accordance  wTith  law. 

Section  16.  At  this  point  it  should  be  remarked  that  the 
imposition  of  a  classified  tax  on  tangible  personal  property 
is  not  a  vital  feature  of  the  general  plan  which  we  recommend. 
Under  our  proposed  system  any  state  desiring  to  do  so  could 
continue  to  tax  tangible  personalty  at  the  same  rate  as  real 
estate  without  violating  any  rule  of  interstate  comity  or  de- 
feating the  general  purpose  of  our  plan.  We  are  here  dealing 
with  a  subject  of  taxation  which  lies  wholly  within  the  juris- 
diction of  the  state  levying  the  tax,  and  no  unjust  or  inconsis- 
tent results  will  develop  if  certain  states  continue  to  tax  tan- 
gible personalty  in  the  same  manner  as  real  estate.  It  should 
also  be   pointed   out  that  our  general  plan  would   not  be 

o  In  the  opinion  of  the  committee,  it  is  desirable  to  exempt  from  taxa- 
tion a  certain  minimum  amount  of  tangible  personal  property,  perhaps 
some  such  figures  as  $200  for  an  individual  and  $400  for  a  family. 


22 

affected  at  any  vital  point  if  some  states,  like  Wisconsin  and 
New  York,  should  prefer  to  exempt  tangible  personalty  from 
all  taxation.  Here,  again,  it  would  be  wholly  a  question  of 
what  a  state  might  prefer  to  do  with  subjects  of  taxation 
lying  within  its  exclusive  jurisdiction.  It  is  true  that  uni- 
formity in  methods  of  dealing  with  tangible  personal  prop- 
erty is  desirable,  and  diversity  will  produce  certain  incon- 
veniences and  difficulties ;  but  these,  although  undesirable,  will 
not  be  so  vital  as  to  jeopardize  the  success  of  our  plan,  and 
will  not  involve  any  questions  of  interstate  comity. 

Section  17.  The  next  recommendation  we  make  is  that 
uniformity  in  the  methods  of  taxing  tangible  personal  prop- 
erty is  extremely  desirable,  and  that  every  possible  effort 
should  be  made  to  this  end.  A  uniform  tax  date  throughout 
each  state,  and  even  throughout  the  United  States,  is  obviously 
to  be  desired.  Uniform  methods  of  valuation  can  in  many 
cases  be  worked  out.  Our  committee  has  not  the  information 
needed  to  enable  us  to  make  definite  recommendations  along 
these  lines,  but  believes  that  practical  results  can  be  readily 
secured  by  committees  of  tax  officials  appointed  by  the  Na- 
tional Tax  Association. 

Section  18.  Our  next  observation  concerning  the  taxation 
of  tangible  property  is  that  effective  administration  is  indis- 
pensable. Under  purely  local  administration  there  never  has 
been,  and  probably  never  will  be,  a  satisfactory  assessment 
except  here  and  there  in  a  few  progressive  localities.  The 
primary  work  of  assessment  will,  of  course,  continue  to  be 
done  by  local  authorities;  but  it  is  essential  that  such  work 
should  be  supervised,  and  where  necessary  controlled,  by  a 
competent  state  tax  commission  or  tax  commissioner.  To  this 
subject  we  shall  hereafter  recur. 

Section  19.  In  the  taxation  of  property  under  the  plan 
proposed,  certain  special  problems  will  be  encountered.  Pub- 
lic service  corporations,  for  example,  are  now  frequently  taxed 
by  methods  different  from  those  applied  to  other  classes  of 
property,  and  must  doubtless  continue  to  be  so  taxed.  Our 
plan,  strictly  applied,  would  require  that  only  the  tangible 
property  of  such  corporations  should  be  subject  to  taxation, 
and  that  the  taxation  of  gross  receipts  and  the  ad  valorem 


23 

taxation  of  corporations  as  going  concerns  should  be  aban- 
doned. But  such  radical  changes  are  not  necessary,  provided 
that  existing  methods  are  adapted  to  the  general  plan  of  taxa- 
tion here  outlined  and  certain  adjustments  are  made  in  con- 
nection with  the  business  tax  which  we  herewith  recommend. 
Uniformity  of  method,  as  we  all  know,  is  not  necessary  in 
order  to  secure  substantial  equality  in  taxation,  and  all  that 
can  be  required  of  any  proposed  system  is  that  it  shall  pro- 
duce substantial  equality  in  its  net  results. 

We,  therefore,  do  not  recommend  that  either  the  taxation 
of  gross  receipts  or  the  ad  valorem,  taxation  of  public  service 
corporations  as  going  concerns  shall  be  discontinued  wherever 
these  methods  are  in  successful  operation.  But  we  are  obliged 
to  point  out  that  in  many,  and  perhaps  most,  cases  the  amount 
of  such  taxation  should  be  reduced  or  else  that  relief  should 
be  given  to  public  service  corporations  in  connection  with  the 
business  tax.  When  public  service  corporations  are  assessed 
as  going  concerns,  it  is  evident  that  they  are  more  heavily 
taxed  than  other  business  enterprises  which  are  subject  to 
taxation  merely  upon  their  property,  considered  as  property, 
and  without  reference  to  their  value  as  going  concerns.  When 
a  corporate-excess  tax  is  applied  to  all  corporations,  equality 
may  then  be  secured  between  public  service  corporations  and 
other  incorporated  companies ;  but  it  is  evident  that  unincor- 
porated concerns  escape  with  a  lighter  tax  than  successful 
corporations  are  required  to  pay. 

It  seems  clear  to  the  committee  that  when  public  service 
corporations  are  assessed  under  an  ad  valorem  system  as  going 
concerns,  while  other  kinds  of  business  are  not,  they  are  today 
discriminated  against,  and  will  be  under  our  proposed  system 
unless  relief  is  given  at  some  other  point.  The  system  we  pro- 
pose enables  us  to  recommend  such  relief.  We  propose  that, 
in  addition  to  the  personal  income  tax  and  to  the  tax  upon 
tangible  property,  there  shall  be  a  business  tax  as  hereafter 
outlined.  Wherever  public  service  or  other  corporations  may 
continue  to  be  taxed  as  going  concerns  by  a  method  which 
involves  the  taxation  of  what  is  commonly  called  the  corporate 
excess,  or  the  good  will,  of  such  companies,  we  recommend 
either  that  they  be  wholly  relieved  of  the  business  tax,  or  that 


24 

the  rate  of  such  tax  be  reduced  to  a  figure  that  will  fairly 
offset  the  extra  burden  of  taxation  imposed  upon  them  by  the 
property  tax. 

In  the  taxation  of  gross  receipts  a  similar  adjustment  k 
necessary  wherever  such  taxation  is  in  lieu  of,  and  is  substan- 
tially equivalent  to,  the  taxation  that  would  otherwise  be  im- 
posed under  an  ad  valorem  tax  upon  corporations  as  going 
concerns.  Concerning  the  comparative  merits  of  the  tax  on 
gross  receipts  and  ad  valorem  taxation,  it  is  unnecessary  for 
us  to  express  any  opinion.  We  should  probably  be  disinclined 
to  recommend  a  change  in  the  taxes  on  gross  receipts  now 
levied  by  such  states  as  Minnesota,  California,  or  Connecticut ; 
and  we  should  be  equally  disinclined  to  recommend  a  change 
in  the  ad  valorem  system  now  in  successful  operation  in  a  state 
like  Wisconsin.  Diversity  of  method  is  not  inconsistent  with 
real  equality  in  taxation,  and  at  this  point  we  content  our- 
selves with  a  mere  expression  of  our  approval  of  the  conclu- 
sions reached  some  years  ago  by  the  committee  appointed  by 
the  National  Tax  Association  to  consider  the  Taxation  of 
Public  Service  Corporations.7 

The  recommendations  which  we  make  concerning  public 
service  corporations  are  equally  applicable  to  other  classes  of 
incorporated  companies.  Our  proposed  system  uniformly  ap- 
plied would  require  that  stockholders  and  bondholders  pay  a 
personal  income  tax  upon  their  interest  and  dividends,  that 
the  corporation  be  taxed  upon  its  tangible  property,  and  that 
finally  the  corporation  pay  a  business  tax  in  any  locality 
where  its  operations  are  carried  on.  But  it  will  not  be  incon- 
sistent with  the  general  plan  if  particular  states  prefer  to 
continue  other  methods  of  taxing  the  property  of  corpora- 
tions, provided  that  they  make  the  adjustment  we  have  rec- 
ommended in  connection  with  the  business  tax.  It  would 
merely  serve  to  divert  attention  from  the  general  plan  we 
recommend  if  we  undertook  at  this  time  a  detailed  examina- 
tion of  the  merits  and  demerits  of  the  various  methods  now 
employed  in  the  taxation  of  business  corporations. 

Section  20.     In  the  taxation  of  national  banks  a  special 

?  Proceedings  of  the  National  Tax  Association,  VII,  372-383. 


25 

complication  arises  on  account  of  the  limitations  imposed  by 
the  federal  statute  .which  now  controls  the  taxation  of  shares 
of  the  capital  stock  of  these  institutions.  The  result,  as  we  all 
know,  is  that  at  present  the  states  are  confined  to  the  taxation 
of  all  banks,  state  and  national,  by  a  single  method,  and  that, 
without  further  enabling  legislation,  it  is  impossible  to  apply 
the  personal  income  tax  to  the  dividends  received  by  owners 
of  national  bank  stock.  It  is  also  a  fact  that,  when  bank 
shares  are  taxed  upon  their  full  value  at  the  prevailing  local 
rates  of  taxation,  they  are  taxed  more  heavily  than  most  other 
classes  of  property  under  the  property  tax.  The  solution  of 
the  difficulty  is  not  easy  to  find,  and  the  committee  has  not 
attempted  to  provide  one.  For  the  purpose  of  this  report,  we 
prefer  to  call  attention  to  the  situation,  and  to  recommend 
that  the  National  Tax  Association  appoint  a  special  committee 
to  work  out  a  plan  of  taxing  banking  institutions  in  a  manner 
consistent  with  the  general  scheme  of  taxation  here  outlined. 

Section  21.  Mines  and  other  mineral  properties  also  pre- 
sent peculiar  difficulties  arising  from  the  nature  of  the  mining 
business.  In  the  time  at  its  disposal,  the  committee  has  been 
unable  to  consider,  except  in  a  general  way,  the  subject  of  the 
taxation  of  mines,  and  only  a  few  of  its  members  are  qualified 
to  deal  with  the  subject.  We  are  agreed  that  mines  should 
pay,  under  whatever  method  may  be  adopted,  a  tax  commen- 
surate with  that  paid  by  other  real  estate  in  the  same  taxing 
district.  But  further  than  this  we  are  unable  to  go  at  this 
time.  In  view  of  the  peculiar  nature  of  the  industry,  we  are 
of  the  opinion  that  the  subject  of  mining  taxation  should  be 
considered  by  a  special  committee  appointed  by  the  National 
Tax  Association,  and  we  so  recommend.8 

Section  22.  Forests  as  well  as  mines  present  peculiar  prob- 
lems which  seem  to  us  to  need  consideration  by  a  committee 
possessing  special  qualifications  for  the  task.  We  are  of  the 
opinion  that  no  special  favors  should  be  extended  to  owners 
of  forest  lands;  but  we  are  impressed  by  the  fact  that  many 

s  Acting  on  this  recommendation  of  the  committee,  the  executive  com- 
mittee of  the  National  Tax  Association  has  authorized  the  appointment 
of  a  special  committee  to  investigate  the  subject  of  the  taxation  of  mines 
and  other  mineral  properties. 


26 

students  of  the  subject  are  of  the  opinion  that  an  annual 
property  tax  discriminates  against  forest  properties,  and  dis- 
courages the  adoption  of  rational  forestry  practice.  We  are 
unwilling  to  express  any  opinion  upon  this  subject;  and  we 
therefore  recommend  that  the  National  Tax  Association  ap- 
point a  special  committee  to  investigate  the  subject  of  the 
taxation  of  forests. 

These  are  the  principal  problems  to  which  the  committee 
desires  to  call  attention.  Doubtless  there  are  others,  connected 
with  the  taxation  of  ships,  of  machinery,  and  perhaps  of  mer- 
chandise, which  may  well  require  further  study  by  special 
committees;  but  concerning  them  we  make  no  recommenda- 
tions at  this  time. 

V.    The  Proposed  Business  Tax 

Section  23.  If  it  had  been  possible  to  reconcile  in  a  satis- 
factory manner  the  legitimate  claims  of  the  several  states  of 
the  American  Union  without  recommending,  in  addition  to 
the  income  and  property  taxes,  a  separate  tax  upon  business, 
the  committee  would  have  preferred  to  do  so.  But  we  find 
that  many  states  are  now  levying  what  are  in  name  or  in  fact 
business  taxes,  upon  the  theory  that  they  have  a  right  to  levy 
taxes  upon  business  done  within  their  jurisdiction.  This  claim 
appears  to  us  to  be  reasonable,  and  we  find  no  other  method 
of  satisfying  it  that  is  consistent  with  interstate  comity,  except 
that  of  levying  a  properly  constituted  business  tax  as  a  part 
of  the  proposed  system.  Perhaps  the  decisive  consideration 
in  the  minds  of  the  committee  is  that  the  income  taxes  which 
are  now  being  introduced  in  a  number  of  the  states  generally 
combine  the  idea  of  personal  with  that  of  business  taxation  in 
a  manner  which,  if  it  continues  and  is  extended,  will  neces- 
sarily result  in  a  large  amount  of  unjust  double  taxation. 
These  income  taxes  are  imposed  upon  residents,  on  the  theory 
that  a  citizen  owes  a  personal  obligation  to  the  government 
under  which  he  lives ;  and  they  are  also  imposed  upon  incomes 
earned  within  the  states  by  non-resident  individuals  and  cor- 
porations, upon  the  theory  that  since  the  business  is  carried 
on  there  the  income  from  the  business  is  properly  subject  to 
taxation.    The  result  is  in  many  instances  a  new  form  of  un- 


27 

just  double  taxation  of  interstate  industries  and  investments, 
which  is  likely  to  increase  unless  a  suitable  remedy  is  found.9 

The  committee  is  also  influenced  by  the  fact  that  the  many 
taxes  now  imposed  upon  business,  in  the  form  of  licenses  or 
otherwise,  by  various  states  are  an  important  factor  in  the 
whole  problem  of  state  and  local  taxation,  which  has  usually 
been  neglected,  or  even  ignored,  in  discussions  of  the  subject. 
These  taxes  are  frequently  illogical  in  their  structure,  and  un- 
equal and  vexatious  in  their  practical  operation.  No  plan  of 
state  and  local  taxation  can  possibly  ignore  their  existence, 
since  there  is  no  likelihood  that  the  states  will  surrender  the 
right  to  tax  business  carried  on  within  their  jurisdictions. 
Viewing  the  matter  from  this  angle,  therefore,  we  are  con- 
vinced that  a  properly  constituted  business  tax  must  be  in- 
cluded in  our  proposed  system  of  taxation.  To  those  who 
may  be  inclined  to  question  the  wisdom  of  adding  a  business 
tax  to  the  proposed  combination  of  income  and  property  taxes, 
we  suggest  that  the  committee  is  not  recommending  anything 
novel  to  American  experience,  but  is  merely  proposing  to  reor- 
ganize upon  a  rational  and  equal  basis  a  form  of  taxation  that 
is  now  prevalent  in  many  of  our  states  and  is  not  likely  to  be 
abandoned  except  for  some  better  form  of  business  taxation. 

It  may  be  well  to  add  also  that  for  such  a  combination  of 
income,  property,  and  business  taxes  there  are  precedents  in 
the  legislation  of  other  countries.  The  original  French  system 
of  direct  taxation  established  by  the  Constituent  Assembly 
provided  for  a  personal  tax,  which  was  regarded  as  a  substi- 

o  The  difficulty  is  only  partly  remedied  by  provisions  for  taxing  in  any 
state  where  business  is  carried  on  only  a  proportionate  part  of  such  busi- 
ness. If  a  resident  of  one  state  receives  dividends  from  shares  of  a  cor- 
poration which  owns  a  plant  in  a  second  state  and  carries  on  business  in 
a  third  where  it  is  subject  to  taxation  upon  an  amount  of  income  corres- 
ponding to  the  business  transacted  in  that  state,  the  stockholder's  divi- 
dends will  be  taxable  in  the  first  state  under  the  theory  of  personal  taxa- 
tion, the  property  and  part  of  the  corporation 's  income  will  be  taxed  in 
the  second  state  under  the  general  property  tax,  and  a  part  of  the  income 
will  be  taxable  in  the  third  state ;  whereas,  if  the  stockholder  had  lived 
in  the  state  where  the  plant  was  located  and  the  corporation  had  done  all 
its  business  in  that  state,  only  one  tax  would  have  been  levied  in  respect 
of  the  corporation 's  income. 


28 

tute  for  an  income  tax,  a  tax  upon  land  and  buildings,  and  a 
tax  upon  business.  Other  taxes  were  subsequently  added  to 
the  original  system,  but  the  three  taxes  just  mentioned  have 
continued  down  to  the  present  day.  In  the  principal  German 
states  an  income  taxJias  been  combined  with  taxes  levied  upon 
land,  buildings,  and  business,  in  a  manner  similar  in  principle, 
though  not  in  its  application,  to  the  system  of  direct  taxation 
established  in  France  in  1791.  There  is,  therefore,  no  lack  of 
precedents  for  the  recommendation  which  the  committee  has 
made. 

Section  24.  In  the  taxation  of  business  various  methods 
may  be  employed.  The  tax  may  be  levied  in  the  form  of  a 
license  or  as  an  ordinary  tax.  Its  amount,  if  not  a  fixed  sum, 
may  be  determined  with  reference  to  the  net  income  of  a  busi- 
ness enterprise,  the  gross  receipts,  the  rental  value  of  the 
premises  occupied,  the  size  of  the  town  or  city  in  which  the 
establishment  is  located,  the  number  of  employees  or  the  num- 
ber of  machines  in  use,  or,  finally,  the  amount  of  raw  materials 
used  by  a  manufacturing  enterprise  or  the  amount  of  goods 
purchased  by  a  mercantile  concern.  In  some  cases,  as  that  of 
the  French  business  tax,  a  number  of  these  elements  are  taken 
into  account  in  determining  the  amount  of  a  taxpayer's  con- 
tribution. Generally  considered,  the  various  methods  resolve 
themselves  into  three:  first,  the  imposition  of  a  tax  of  fixed 
amount ;  second,  the  levy  of  a  tax  upon  net  income ;  and  third, 
the  adoption  of  various  external  indicia,  such  as  gross  receipts, 
rentals,  and  the  like,  which  are  considered  to  be  approximately 
fair  indications  of  the  profits  of  a  business. 

It  is  evident  that  a  tax  of  fixed  amount,  such  as  is  often 
imposed  by  license  taxes,  even  though  the  amount  may  vary 
for  different  trades  and  occupations,  cannot,  on  account  of  its 
inequality,  be  recommended  as  an  adequate  method  of  taxing 
business.  In  connection  with  licenses  imposed  upon  certain 
occupations  chiefly  for  the  purpose  of  police  regulation,  a 
charge  of  fixed  amount  may  be  entirely  wise  and  unobjection- 
able. But  the  case  is  very  different  with  a  tax  levied  with  a 
view  of  obtaining  revenue. 

External  indicia  of  business  profits  may  be  adopted  as  the 
basis  of  a  system  of  business  taxation  with  very  tolerable  re- 


29 

suits.  They  produce  a  certain  amount  of  inequality,  since 
none  of  the  indicia  can  lead  to  anything  but  a  very  rough  ap- 
proximation of  business  profits.  A  combination  of  several 
indicia,  such  as  gross  receipts,  rental  values  of  premises  occu- 
pied, and  the  number  of  employees,  might,  together  with  a 
proper  classification  of  occupations  and  a  carefully  adjusted 
schedule  of  rates,  result  in  a  form  of  business  taxation  that 
would  operate  as  well  as,  let  us  say,  the  French  business  tax. 
But  administrative  difficulties  multiply  as  the  basis  of  taxa- 
tion is  made  more  complicated,  so  that  ultimately  a  point  is 
reached  where  such  a  system  becomes  less  convenient  and  in 
some  ways  more  troublesome  than  a  system  which  at  the  start 
adopts  net  income  as  its  basis. 

Section  25.  The  committee  has  come  to  the  conclusion, 
therefore,  that  the  proposed  business  tax  should,  except  in 
certain  cases,  be  levied  upon  the  net  income  derived  from 
business  carried  on  within  the  state  levying  the  tax.  Prior  to 
the  coming  of  the  federal  income  tax,  it  would  probably  have 
been  unwise  and  impracticable  to  adopt  net  income  as  the  basis 
of  business  taxation.  But  today  every  business  concern  of 
any  considerable  size  is  obliged  to  make  a  return  of  its  net 
income  to  the  federal  government;  and  it  is,  therefore,  both 
practicable  and  convenient  to  impose  a  business  tax  upon  net 
income.  This  will  involve,  of  course,  in  the  case  of  interstate 
concerns,  the  determination  of  the  proportion  of  the  income 
derived  from  business  carried  on  in  each  state.  But  there  are 
practicable  methods  of  making  such  a  determination,  so  that 
no  serious  difficulty  need  arise  at  this  point.  With  proper 
administration,  we  believe  that  a  tax  thus  levied  upon  net  in- 
come will  be  so  far  superior  to  any  tax  levied  according  to 
external  indicia  of  business  profits  that  there  can  be  no  doubt 
concerning  the  advisability  of  adopting  it. 

There  may,  however,  be  certain  cases  in  which  an  exception 
should  be  made  to  the  general  rule.  Concerns  so  small  as  to  be 
exempt  from  the  federal  income  tax  might  be  taxed  upon  their 
gross  receipts,  their  gross  purchases,  or  the  rental  value  of  the 
premises  occupied,  with  the  provision  that  the  tax  in  no  case 
should  be  less  than  a  certain  minimum  amount,  perhaps  $2.00. 
In  any  case  where  the  apportionment  of  net  income  from  an 


30 

interstate  business  is  peculiarly  difficult,  it  may  be  that  an 
adequate  tax  upon  gross  receipts  within  the  state  should  be 
substituted  for  a  tax  upon  the  net  income.  The  desire  to 
secure  equality  should  not  lead  us  to  adopt  a  Procrustean 
method,  which  permits  of  no  adjustment  to  meet  special  cases. 
But  we  believe  that  only  genuinely  exceptional  cases  require 
any  departure  from  the  general  rule,  and  suggest  that  the 
burden  of  proof  rests  very  decidedly  upon  anyone  who  asks 
for  exceptional  treatment. 

Section  26.  Obviously  the  rate  of  the  business  tax  should 
be  proportional  and  not  progressive.  Neither  the  absolute 
amount  of  the  net  income  nor  the  relation  it  bears  to  the  in- 
vested capital  have  any  bearing  upon  the  question  of  how 
much  a  business  concern  should  pay  for  the  benefits  it  derives 
from  the  government  under  which  it  carries  on  its  business. 
A  concern  which  invests  a  large  capital,  and  therefore  earns  a 
large  income,  cannot  be  assumed  to  benefit  more  than  in 
direct  proportion  to  the  size  of  its  investment  or  the  amount 
of  its  income ;  while  the  relation  of  the  income  to  the  invested 
capital  is  an  indication  of  the  success  with  which  the  business 
has  been  managed  rather  than  the  amount  of  public  service 
which  it  has  received.  Moreover,  in  practice,  graduation  of 
rates  will  produce  difficulties  which  are  bound  to  react  un- 
favorably upon  the  general  administration  of  the  law,  since  it 
will  produce  in  many  cases  absurd  results  which  cannot  be 
remedied  except  by  the  arbitrary  discretionary  action  of  the 
tax  officials. 

The  actual  rate  of  the  tax  should  be  moderate.  Where  the 
business  requires  the  employment  of  a  substantial  amount  of 
tangible  property,  the  business  tax  will  be  in  addition  to  a  tax 
paid  upon  that  property ;  and  in  cases  where  the  business  em- 
ploys little  or  no  property  in  a  particular  locality,  it  is  evident 
that  the  concern  is  making  but  comparatively  small  demands 
upon  the  services  of  the  government.  One  per  cent  of  the  net 
income  derived  from  business  done  in  the  locality  would  be  a 
very  light  tax;  and  we  believe  that,  in  general,  a  tax  of  two 
per  cent  of  such  income  would  be  adequate.  Exceptional  con- 
ditions in  particular  states  may  justify  higher  rates,  but  we 
believe  that  the  rates  in  no  case  should  exceed  five  per  cent, 


31 

and  that  very  exceptional  conditions  would  be  required  to 
justify  such  a  high  rate  for  a  business  tax  levied  as  a  part  of 
such  a  system  as  we  propose. 

Section  27.  It  seems  clear  to  us  that  the  administration  of 
a  business  tax  must  be  placed  in  the  hands  of  the  state  tax 
commission  or  tax  commissioner.  All  the  considerations  which 
make  it  desirable  that  the  personal  income  tax  should  be  ad- 
ministered by  state  rather  than  by  local  officials  apply  with 
equal  force  to  a  business  tax  levied  upon  net  income;  while 
there  is  the  further  fact  that,  if  the  state  administers  the  per- 
sonal income  tax,  it  can  administer  the  business  income  tax 
more  conveniently,  economically,  and  efficiently  than  any 
county  or  municipal  authorities.  The  same  is  true  of  any  tax 
that  may  be  levied  in  exceptional  cases  upon  gross  receipts  in 
lieu  of  net  income.  Upon  the  other  hand,  taxes  levied  in  ex- 
ceptional cases  upon  the  basis  of  rental  values,  or  levied  in 
fixed  amount  upon  particular  occupations  requiring  special 
police  regulation,  may  be  left  to  local  administration. 

Section  28.  The  proceeds  of  the  proposed  business  tax  may 
well  be  divided  between  the  state  and  local  authorities  in  due 
proportions.  Our  recommendation  is  that  the  states  retain  a 
proportion  corresponding  to  that  which  state  revenues  or  ex- 
penditures bear  to  the  total  state  and  local  expenditures  or 
revenues,  and  that  the  remainder  should  be  turned  over  to  the 
taxing  district  in  which  business  is  carried  on.  The  details  of 
the  plan  of  distribution  may  well  vary  from  state  to  state,  but 
this  general  rule  seems  to  us  a  satisfactory  general  guide.10 

Section  29.  It  goes  without  saying  that  the  business  tax 
we  recommend  is  proposed  as  a  substitute  for  all  existing  busi- 
ness taxes.  The  diversity,  multiplicity,  and  inequality  of  the 
existing  taxes  levied  upon  business  by  both  state  and  local 
authorities  in  many  commonwealths  have  long  constituted  seri- 
ous evils,  and  the  time  has  certainly  come  when  better  methods 
should  be  adopted.  Unless  the  business  tax  is  imposed  by  a 
single  assessment,  the  revenue  being  distributed  as  we  pro- 
pose, it  is  obvious  that  the  desired  end  will  not  be  accom- 
plished.    There  is  great  need  of  a  simple  system,  admitting 

io  See,  however,  page  44. 


32 

as  few  exceptions  as  possible,  and  uniform  so  far  as  practi- 
cable in  all  of  the  states  which  desire  to  levy  business  taxes. 
There  is  need  also  of  better  administration,  which  can  be 
secured  only  through  state  authorities,  as  we  have  recom- 
mended. We  are  proposing,  in  fine,  the  adoption  of  a  com- 
paratively simple  a*nd  uniform-  system  of  business  taxation  in 
place  of  the  multifarious,  vexatious,  and  frequently  unequal 
methods  now  employed  in  many  of  our  states. 

In  concluding  this  subject,  we  may  point  out  that  under  our 
proposed  system  there  is  no  necessity  that  any  state  which 
prefers  to  dispense  entirely  with  business  taxation,  except 
minor  license  taxes  such  as  are  everywhere  imposed  for  police 
purposes,  should  adopt  a  business  tax  if  it  prefers  not  to  do 
so.  It  may  well  be  that  some  states  will  consider  that  a  per- 
sonal income  tax  and  a  tax  levied  upon  tangible  property 
meet  fully  the  needs  of  their  situation,  and  may,  therefore,  be 
reluctant  to  adopt  the  third  proposed  tax.  To  such  we  say 
that  there  is  no  necessity  of  doing  so  if  a  state  is  willing  to  re- 
nounce completely  the  claim  to  impose  a  tax  upon  business,  as 
business,  simply  because  it  is  carried  on  within  its  jurisdiction. 
A  state  will  do  nothing  opposed  to  interstate  comity,  will  im- 
pose no  unjust  double  taxation,  and  will  not  interfere  with 
any  other  state  which  desires  to  impose  taxes  upon  business, 
if  it  decides  not  to  assert  the  principle  upon  which  the  taxa- 
tion of  business  is  founded.  This  will  mean  necessarily  that 
non-resident  individuals  and  corporations  employing  little  or 
no  tangible  property  within  its  jurisdiction  but  carrying  on 
business  and  earning  substantial  profits  there,  will  not  be  re- 
quired to  contribute  to  the  support  of  its  government.  We 
have  nowhere  asserted  that  it  is  every  state's  duty  to  make 
such  persons  or  business  concerns  contribute,  but  have  merely 
recognized  that  it  is  reasonable  for  any  state  to  do  so  if  it  de- 
sires. Our  argument  has  merely  been  that,  if  interstate  comity 
is  to  be  respected  and  unjust  multiple  taxation  avoided,  any 
state  that  taxes  business  must  levy  a  tax  upon  all  business 
done  within  its  limits,  whether  conducted  by  individuals, 
partnerships,  or  corporations,  and  must  not  levy  its  personal 
income  tax  or  its  taxes  upon  property  or  corporate  franchises 
in  such  a  maimer  as  to  impose  unequal,  and  therefore  unjust, 


33 

multiple  taxation  upon  interstate  business  and  investments. 
We  have,  in  a  word,  undertaken  to  provide  a  reasonable,  fair, 
and  practicable  method  of  business  taxation  which  any  state 
can  employ  consistently  with  the  rules  of  interstate  comity; 
but  we  have  not  argued  that  every  state  ought  to  adopt  this 
form  of  taxation,  irrespective  of  its  particular  situation  and 
fiscal  needs. 

VI.    Summary  of  the  Proposed  System  of  Taxation 

Section  30.  At  this  point  it  is  desirable  to  consider  as  a 
whole  the  proposed  system  of  taxation.  In  the  first  place,  it. 
is  evident  that  this  system  will  satisfy  every  legitimate  claim 
of  any  American  state.  It  provides  that  all  persons  shall  be 
taxed  fairly  and  fully  at  their  place  of  domicile  for  the  per- 
sonal benefits  they  derive  from  the  government.  It  provides 
that  all  tangible  property  which  any  state  may  desire  to  tax 
shall  be  taxed  fully  at  its  situs  for  the  governmental  services 
it  there  receives.  It  eliminates  the  taxation  of  intangible 
property,  as  property,  because  such  taxation  cannot  be  carried 
out  without  a  large  amount  of  unjust  double  taxation.  And, 
finally,  it  provides  a  method  by  which  any  state  which  desires 
to  tax  business  may  do  so  in  a  fair  and  effective  manner.  No 
single  tax  levied  either  on  income  or  property  could  possibly 
satisfy  all  of  these  claims,  unless  all  the  states,  by  formal 
agreement,  should  adopt  a  plan  by  which  one  tax  could  be 
levied  upon  interstate  business  and  investments,  the  proceeds 
of  which  would  be  distributed  in  some  agreed  proportions  be- 
tween the  states  of  domicile,  the  states  where  property  is 
located,  and  the  states  in  which  business  is  carried  on.  Such 
an  agreement  we  believe  it  is  impossible  to  secure;  and  we 
have,  therefore,  recommended  three  separate  taxes,  each  of 
which  can  be  levied  in  such  a  manner  as  to  enforce  fully, 
fairly,  and  consistently  the  taxation  of  the  subjects  it  is  in- 
tended to  reach. 

Section  30.  In  the  second  place,  it  is  evident  that  the 
combination  of  taxes  we  have  recommended  will  give  better 
results  than  any  one  tax,  however  levied,  which  is  made  to 
yield  the  same  amount  of  revenue.  With  the  best  drawn  law 
and  the  very  best  of  administration,  there  will  always  be  a 


34 

certain  amount  of  inequality  in  the  operation  of  any  tax.  If, 
therefore,  all  the  revenue  needed  is  derived  from  but  one  tax, 
such  inequality  as  inevitably  arises  will  be  concentrated  at  a 
few  points  where  it  cannot  be  mitigated.  But  under  a  system 
by  which  the  same  amount  of  revenue  is  collected  from  sep- 
arate taxes  levied  upon  income,  property,  and  business,  it  is 
clear  that  such  inevitable  inequalities  as  arise  in  the  working 
of  any  one  tax  may  be,  and  to  a  considerable  extent  must  be, 
offset  or  mitigated  by  inequalities  arising  under  the  others. 
By  the  mere  law  of  probability,  it  must  happen  that  the  in- 
equalities arising  under  the  three  separate  taxes  will  not  all 
be  concentrated  at  the  same  point,  and  that  some  of  them  will 
to  a  certain  extent  compensate  for  others.  This  is  one  of  the 
reasons  why  a  double  system  of  income  and  property  taxation 
has  worked  well  in  certain  European  countries  and  has  met 
with  increasing  favor  from  students  of  taxation  and  practical 
administrators.  We  regard  this  compensatory  action  of  the 
three  taxes  we  have  recommended  as  an  important  argument 
in  favor  of  our  proposals. 

Section  31.  A  third  point  to  be  emphasized  is  that  the 
system  here  recommended  will  bring  about  heavier  taxation  of 
funded  incomes  than  unfunded,  without  requiring  the  states 
to  undertake  the  very  difficult  task  of  differentiating  the  rates 
of  their  income  taxes.  That  funded  incomes  should  be  more 
heavily  taxed  than  unfunded,  nearly  all  will  agree.  At  the 
same  time,  it  is  certain  that  the  attempt  to  levy  an  income  tax 
at  different  rates  on  different  kinds  of  income  greatly  compli- 
cates the  administration  of  the  tax,  and  raises  difficult  prob- 
lems which  any  one  familiar  with  the  practical  side  of  tax 
administration  would  desire  to  avoid.  But  it  is  evident  that, 
by  combining  a  tax  upon  property  with  a  tax  upon  income,  we 
shall  in  effect  impose  heavier  taxation  upon  funded  incomes: 
and  therefore  the  net  result  of  our  tax  system  will  be  to  secure 
differentiation  without  undertaking  the  very  difficult  task  of 
differentiating  the  rates  of  the  income  tax. 

Section  32.  Finally,  the  committee  desires  to  point  out 
that,  although  the  proposed  system  prescribes  certain  lines  of 
action  which  must  be  followed  if  interstate  comity  is  to  be 
observed,  it  admits  of  considerable  elasticity  at  other  points. 


35 

The  personal  income  tax  does,  indeed,  require  definite  rules 
which  cannot  be  violated  without  undesirable  results.  It  must 
be  levied  upon  persons  at  their  place  of  domicile,  and  must 
not  be  levied  upon  the  income  from  property  at  its  situs  or 
the  income  from  business  at  the  place  where  business  opera- 
tions are  carried  on.  The  property  tax,  however,  permits  of 
such  adjustments  in  the  taxation  of  corporations,  mines,  for- 
ests, and  certain  other  things  as  may  be  necessary  to  fit  exist- 
ing taxes  into  the  proposed  system  or  to  improve  existing 
methods  which  may  be  deemed  to  be  unsatisfactory.  The  busi- 
ness tax  also  permits  such  adjustments  as  may  suit  the  condi- 
tions of  different  states.  The  committee  is  obliged  to  insist 
that,  if  such  a  tax  is  levied,  it  should  be  levied  equally  upon 
all  business  carried  on  within  the  state,  under  whatever  form 
of  organization  it  is  conducted,  since  this  is  the  only  manner 
by  which  unfair  burdens  on  interstate  business  can  be  avoided. 
But  we  see  no  reason  why  every  state  ought,  from  the  nature 
of  the  case,  to  impose  business  taxes ;  and  while  we  recommend 
a  tax  upon  net  income  as  the  best  form  of  business  tax,  we 
have  pointed  out  that  in  special  cases  taxation  upon  the  basis 
of  external  indicia  may  be  preferable  and  entirely  consistent 
with  our  general  plan  of  taxation. 

Section  33.  A  word  should  be  said  concerning  the  relation 
of  our  plan  to  the  classified  property  tax  which  for  some  years 
has  played  no  unimportant  part  in  discussions  of  state  and 
local  taxation.  It  is  evident  that  the  flat  tax  upon  intangibles, 
which  is  a  part  of  every  classified  property  tax,  is  unnecessary 
under  the  scheme  we  propose.  The  purpose  of  the  tax  on  in- 
tangible property  is  chiefly  to  enforce  the  principle  that  every 
citizen,  no  matter  where  his  investments  are  located,  should 
pay  a  direct  tax  to  the  government  under  which  he  is  domi- 
ciled. It  is  evident  that  this  purpose  is  fully  carried  out  by 
the  personal  income  tax  which  we  have  recommended,  and, 
therefore,  we  have  not  recommended  any  tax  on  intangible 
property  as  a  part  of  our  proposed  plan.  With  intangibles 
eliminated  from  the  operation  of  the  property  tax,  we  have 
left  only  the  question  of  how  tangible  property  shall  be 
treated;  and  we  have  recommended  that  tangible  personal 
property  be  separated  from  real  estate  and  made  subject  to  a 


36 

lower  rate  of  taxation.  It  will  be  seen,  therefore,  that,  so  far 
as  tangible  property  is  concerned,  our  plan  is  based  upon  the 
idea  underlying  the  classified  property  tax,  and  that  our  plan 
differs  from  the  latter  chiefly  by  reason  of  the  fact  that  it 
eliminates  wholly  the  taxation  of  intangible  property. 

The  relation  of  existing  state  income  taxes  to  the  proposed 
plan  should  also  be  considered  briefly.  The  Wisconsin  income 
tax  is  in  part  a  personal  income  tax  like  that  which  we  pro- 
pose, and  in  part  a  tax  upon  business  incomes.  A  part  of  it, 
therefore,  would  find  its  place  naturally  in  our  proposed  per- 
sonal income  tax,  and  the  other  part  could  readily  find  a  place 
in  our  proposed  business  tax.  The  Massachusetts  income  tax 
is  throughout  its  entire  structure  a  personal  tax,  since  it  is  in 
no  case  levied  upon  non-resident  persons  or  interests.  It  is, 
therefore,  a  proper  nucleus  for  a  personal  income  tax,  but 
fulfils  in  no  respect  the  functions  of  our  proposed  business  tax. 
The  corporation  income  taxes  of  Connecticut,  New  York,  West 
Virginia,  and  Montana  may  be  classified  as  business  taxes, 
and  within  certain  modifications  can  readily  meet  the  require- 
ments of  our  system.  Some  of  the  other  state  income  taxes, 
which  have  been  modeled  after  the  federal  income  tax,  are 
more  difficult  to  classify  and  violate  some  of  the  principles  we 
have  advocated ;  but  they  at  least  serve  to  establish  the  prin- 
ciple of  state  taxation  of  income,  and  can  be  remodeled  in  a 
manner  conforming  to  the  requirements  of  the  plan  we  pro- 
pose. 

VII.    Tax  Administration 

Section  34.  Since  the  best  tax  laws  will  not  work  satisfac- 
torily if  they  are  badly  administered,  the  committee  desires  to 
submit  some  observations  and  recommendations  concerning 
administration.  It  is  well  known  that  many  of  our  states,  by 
creating  tax  commissions  or  appointing  tax  commissioners, 
have  greatly  improved  the  administration  of  their  laws  in  re- 
cent years ;  but  it  is  also  known  to  all  that,  taking  the  country 
as  a  whole,  there  is  still  need  of  great  improvement  in  tax  ad- 
ministration. We  have  already  made  several  recommenda- 
tions concerning  the  administration  of  the  particular  taxes 
which  we  have  proposed,  but  we  are  unwilling  to  submit  our 


37 

new  system  without  considering  more  broadly  and  generally 
the  subject  of  administration. 

Section  35.  In  the  United  States  the  assessment  of  prop- 
erty has  always  been  entrusted  to  local  officials,  and  doubtless 
will  continue  to  be  performed  by  local  agencies.  The  local 
assessor,  therefore,  is  a  vitally  important  part  of  our  system 
of  administration ;  and  if  his  work  is  not  well  performed,  no 
mere  process  of  correction  will  ever  bring  about  a  good  assess- 
ment of  property.  We  are  in  complete  agreement  with  the 
conclusions  reached  by  the  committee  appointed  by  the  Na- 
tional Tax  Association  a  few  years  ago  to  consider  the  subject 
of  the  administration  of  tax  laws.11  Besides  endorsing  the 
findings  of  that  committee,  we  desire  in  this  report  to  make 
the  following  specific  recommendations : 

A.  Assessment  districts  should  be  large  enough  to  justify 
the  employment  of  at  least  one  permanent  official  in  each  such 
district,  who  should  receive  a  salary  sufficient  to  "make  it  pos- 
sible for  him  to  give  all  his  time  to  the  work.  Such  permanent 
assessors  should  be  provided  with  well  equipped  offices,  a  suit- 
able number  of  permanent  clerks,  and  such  part-time  assist- 
ants as  may  be  needed  for  a  short  period  in  each  year.  Even 
if  assessments  are  not  made  annually,  there  is  always  enough 
work  of  investigation  and  of  keeping  track  of  new  develop- 
ments to  justify  the  employment  of  a  permanent  force.  At 
present  many  assessment  districts  are  too  small  to  make 
proper  compensation  possible ;  and  the  result  is  that  the  work 
is  done  by  persons  who  cannot  give  to  it  the  time  it  ought  to 
receive  and  seldom  acquire  the  necessary  expert  and  technical 
knowledge.  Manifestly,  the  county  is  a  better  assessment  dis- 
trict than  the  township ;  and,  generally  speaking,  we  may  sug- 
gest that  it  is  undesirable  to  erect  assessment  districts  smaller 
than  a  county,  unless  such  districts  have  a  sufficient  popula- 
tion to  enable  them  to  employ  at  least  one  permanent  assessor 
and  a  suitable  staff. 

B.  Whether  assessors  should  be  appointed  or  elected  is  a 
question  about  which  there  may  be  room  for  difference  of 

11  For  the  report  of  this  committee,  see  Proceedings  of  the  National 
Tax  Association,  IX,  197-207. 


38 

opinion.  The  committee,  however,  favors  strongly  the  method 
of  appointment,  since  it  does  not  believe  that,  other  things 
being  equal,  elective  officials  can  or  will  perform  their  work  as 
efficiently  as  appointive.  Recognizing,  however,  that  there 
may  be  serious  difference  of  opinion  at  this  point,  we  make  no 
specific  recommendation;  and  content  ourselves  with  recom- 
mending that,  whether  assessors  are  elected  or  appointed,  they 
should  serve  for  a  term  of  at  least  four  years  in  order  that 
there  may  be  reasonable  continuity  in  their  work"  and  that 
there  may  be  time  for  their  policies  to  justify  themselves  by 
their  results. 

C.  We  recommend  that  all  assessors,  whether  elected  or 
appointed,  be  subject  to  removal  for  wilful  negligence  or  mal- 
feasance in  office.  This  power  of  removal  should  be  placed  in 
the  hands  of  the  state  tax  commission,  which  should  be  author- 
ized, either  upon  complaint  or  upon  its  own  motion,  and  after 
hearing  all  parties  in  interest,  to  remove  a  local  assessor  from 
office.  This  power  is  now  given  to  the  tax  commission  in  cer« 
tain  states,  and  has  led  to  excellent  results.  Even  though  sel- 
dom exercised,  the  very  existence  of  such  a  power  tends  to 
prevent  many  abuses  and  to  secure  a  more  efficient  adminis- 
tration of  tax  laws. 

Section  36.  That  a  permanent  state  tax  commission,  or  tax 
commissioner,  should  be  established  in  every  state,  is  a  recom- 
mendation which  today  requires  no  argument  to  support  it. 
We  will  merely  say  that  neither  the  system  of  taxation  which 
we  recommend  nor  any  other  can  be  expected  to  give  satisfac- 
tory results  in  states  that  refuse  to  place  in  the  hands  of  some 
permanent  central  authority  the  administration  of  taxes  upon 
incomes  and  inheritances,  the  original  assessment  of  certain 
classes  of  property,  and  general  supervisory  powers  over  the 
assessment  of  all  property  subject  to  local  taxation. 

How  this  central  authority  should  be  constituted  is  natur- 
ally the  next  subject  for  consideration.  We  believe  that  ex- 
perience has  abundantly  proved  that  a  state  board  constituted 
of  ex-officio  members  is  totally  inadequate  for  the  work  in 
hand.  The  members  of  such  a  board  have  other  duties  and 
responsibilities  which  have  first  claim  upon  their  interest  and 


39 

time,  so  that  they  never  become  experts  in  taxation  and  sel- 
dom give  adequate  attention  to  their  work  as  members  of  a 
tax  commission.  In  states  which  are  content  to  vest  in  ex- 
officio  boards  central  control  over  the  administration  of  their 
tax  laws,  we  cannot  expect  satisfactory  results  from  our  pro- 
posed system  of  taxation,  or,  indeed,  from  any  other. 

Wllether  a  tax  commission  is  to  be  preferred  to  a  single 
commissioner,  is  a  point  upon  which  there  is  certainly  room 
for  difference  of  opinion.  In  many,  if  not  most,  of  the  states 
that  have  tax  commissions  it  would  have  been  impossible  to 
secure  enactment  of  laws  vesting  in  the  hands  of  a  single  com- 
missioner the  authority  given  to  the  commissions.  Upon  the 
other  hand,  some  states  have  developed  strong  and  efficient  tax 
departments  under  the  authority  of  a  single  commissioner,  and 
evince  no  desire  to  change  this  arrangement.  It  is  also  true  . 
that  the  internal  taxes  of  the  United  States  are  collected  by  a 
department  which  has  at  its  head  a  single  commissioner.  The 
committed  believes,  therefore,  that  there  is  no  reason  to  sup- 
pose that  a  commission  is  always  to  be  preferred  to  a  single 
commissioner,  or  that  a  tax  department  with  a  single  head  is 
always  to  be  preferred  to  a  tax  commission ;  and  concludes 
that  the  important  thing  is  the  adequacy  of  the  resources  and 
extent  of  the  authority  conferred  upon  the  state  tax  depart- 
ment. 

Where  the  commission  exists,  the  members  should  be  ap- 
pointed, in  classes,  for  terms  of  at  least  six  years.  Provision 
should  be  made  that  all  the  members  of  the  commission  should 
not  belong  to  the  same  political  party,  and  every  effort  should 
be  made  to  remove  their  appointment  from  politics.  The  sala- 
ries paid  should  be  adequate  to  secure  men  of  first-class  ability, 
and  removal  from  office  should  be  authorized  only  for  cause 
and  after  due  hearing  of  all  parties  in  interest. 

The  powers  of  the  tax  commission  should  include:  (a)  orig- 
inal assessment  of  all  property  or  business  that  has  a  state- 
wide rather  than  a  local  character,  all  financial  institutions, 
and  public  utility  companies  of  every  description ; 12  (b)  the 
assessment  of  the  personal  income  tax  and  the  tax  on  business 

i-  Certain  other  classes  of  property,  such  as  mines,  may  well  be  included 
in  this  list,  hut  we  will  not  undertake  further  specification. 


40 

incomes  which  we  have  here  recommended,  also  the  adminis- 
tration of  inheritance  taxes  and  any  other  state  transfer 
taxes;  (c)  the  equalization  of  property  assessments  for  the 
purposes  of  state  taxation  and  the  equalization  of  county  as- 
sessments whenever  there  are  different  assessment  districts 
within  a  county;  *•  (d)  directive  and  supervisory  power  over 
the  assessment  of  property,  including  the  power  to  order  re- 
assessment and,  if  necessary,  to  appoint  appraisers  to  reassess 
any  property  that  local  officials  have  not  assessed  in  accord- 
ance with  the  law;  (e)  power  of  removal,  after  a  hearing,  of 
local  assessors  for  inefficiency  or  misconduct;  (f)  authority  to 
act  as  board  of  appeal  in  such  cases  as  may  be  necessary ;  and 
(g)  authority  to  investigate  the  entire  subject  of  taxation,  and 
to  gather  and  publish  comprehensive  statistics  concerning  all 
matters  of  taxation  and  public  finance. 

Section  37.  The  committee  has  recommended  that  the  pro- 
posed personal  income  and  business  income  taxes  should  be 
administered  by  state  rather  than  local  authorities,  ahd  in  the 
previous  section  we  have  pointed  out  that  the  state  tax  com- 
mission or  tax  commissioner  should  be  entrusted  with  this 
work.  For  this  purpose  it  is  very  desirable,  and  even  neces- 
sary if  the  best  results  are  to  be  secured,  that  a  state  should  be 
divided  into  income-tax  assessment  districts  of  convenient  size, 
each  of  which  should  be  placed  in  charge  of  a  district  assessor 
of  incomes,  appointed  by  the  state  tax  commission,  or  tax 
commissioner,  and  directly  responsible  to  the  same  authority. 
The  success  of  the  Wisconsin  and  the  Massachusetts  income 
tax  laws  is  due  in  large  part  to  the  fact  that  the  administra- 
tion was  placed  wholly  in  the  hands  of  the  state  tax  depart- 
ments. But  it  was  due  also,  in  no  small  degree,  to  the  work 
of  the  district  assessors  who  served  the  useful  purpose  of 

is  This  recommendation  means,  of  course,  that  there  should  be  no  sep- 
arate state  board  of  equalization.  We  are  aware  that  in  certain  states 
where  there  are  no  tax  commissions  there  are  state  boards  of  equalization 
which  now  possess  some  of  the  functions  of  a  tax  commission,  and  may  at 
any  time  be  clothed  with  other  such  functions.  Such  boards  should  be,  as 
fast  as  possible,  developed  into  competent  tax  commissions  of  the  type 
that  we  recommend.  Whether  they  would  better  retain  their  present 
names  or  be  known  as  tax  commissions,  is  probably  not  a  matter  of  great 
importance ;  but  we  venture  to  express  our  preference  for  the  latter  name. 


41 

bringing  the  administration  of  the  law  home  to  the  people  of 
the  several  districts  and  helpfully  decentralizing  the  work  of 
administration.  In  the  more  populous  states  we  believe  that 
such  a  district  organization  is  necessary  for  the  successful 
operation  of  income  taxes ;  and  we,  therefore,  strongly  recom- 
mend it.  In  the  less  populous  states,  it  may  be  necessary  for 
the  state  tax  department  to  deal  directly  with  all  persons  sub- 
ject to  the  income  tax.  In  all  states,  the  establishment  of  an 
income  tax  bureau  within  the  state  tax  department  is  abso- 
lutely essential. 

It  is  obvious  that  district  assessors  of  income  may  be  ad- 
vantageously utilized  in  the  general  supervisory  work  of  the 
state  tax  commission  or  commissioner.  Wisconsin  now  em- 
ploys district  assessors  of  income  as  supervisors  of  local  as- 
sessors within  their  districts,  and  thus  has  established  a  useful 
connecting  link  between  the  state  tax  department  and  the 
local  assessing  boards.  On  other  grounds,  such  an  interme- 
diary between  the  state  and  the  local  taxing  authorities  is 
very  desirable;  and  we,  therefore,  point  out  that  the  estab- 
lishment of  district  assessors  of  incomes  will  facilitate  greatly 
the  carrying  out  of  the  supervisory  powers  with  which  every 
state  tax  department  ought  to  be  clothed. 

VIII.    The  Inheritance  Tax 

Section  38.  In  this  report  the  committee  has  preferred  to 
make  no  specific  recommendation  concerning  the  taxation  of 
inheritances.  Such  taxes  are  now  in  operation  in  almost  every 
state,  and  it  is  certain  that  they  are  a  permanent  part  of  our 
system  of  taxation.  The  committee  strongly  favors  the  use  of 
the  inheritance  tax  by  the  American  states,  and  is  in  general 
accord  with  the  various  recommendations  which  have  been 
made  from  time  to  time  by  committees  appointed  by  the  Na- 
tional Tax  Association.  We  have  felt  obliged,  however,  to  de- 
vote our  attention  principally  to  other  subjects  concerning 
which  there  is  greater  diversity  of  opinion  and  greater  need 
for  thoroughgoing  reforms.  It  is  clear  that  none  of  our  rec- 
ommendations, if  carried  out,  will  interfere  in  any  way  with 
the  levy  of  inheritance  taxes  by  the  states ;  and  we  have,  there- 
fore, concluded  that  further  study  of  this  subject  could  prop- 


42 

erly  be  left  to  some  other  committee,  or  undertaken  by  our 
committee  in  some  subsequent  year.  Our  decision  is  due  solely 
to  limitations  of  time,  and  does  not  imply  lack  of  appreciation 
of  the  importance  of  the  inheritance  tax  in  any  rational  system 
of  state  taxation.      ~ 

IX.    Taxes  upon  Consumption 

Section  39.  In  the  course  of  its  deliberations,  the  commit- 
tee has  had  occasion  to  consider  whether,  in  view  of  the  great 
increase  of  state  and  local  expenditures  in  recent  times  and 
the  entrance  of  the  federal  government  into  the  field  of  direct 
taxation  which  had  hitherto  been  utilized  exclusively  by  the 
states,  it  might  be  possible  for  the  states  to  derive  more  reve- 
nue than  in  the  past  from  taxes  levied  upon  consumption. 
The  taxes  now  levied  by  the  states  upon  automobiles  repre- 
sent the  sort  of  taxes  which  the  committee  has  in  mind.  Taxes 
upon  amusements,  on  non-alcoholic  as  well  as  alcoholic  bev- 
erages, on  hunting  licenses,  and  a  few  other  things,  have  been 
brought  to  our  attention;  but  we  have  decided  to  make  no 
recommendation  upon  the  subject  at  this  time.  It  is  perfectly 
evident  that,  with  the  exception  of  automobiles,  none  of  the 
taxes  which  have  been  suggested  will  ever  be  likely  to  consti- 
tute an  important  source  of  revenue ;  and  we  have  preferred 
to  concentrate  attention  this  year  upon  the  problems  of  chief 
practical  importance.  It  may  well  be,  however,  that  at  some 
future  time  the  National  Tax  Association  will  do  well  to  ap- 
point a  committee  to  canvass  carefully  the  possibility  of  sup- 
plementing existing  sources  of  state  and  local  revenue  by 
taxes  levied  upon  what  may  be  fairly  classified  as  luxurious 
consumption. 

X.  The  Separation  of  the  Sources  of  State  and  Local 

Eevenue 

Section  40.  The  proposal  to  separate  the  sources  of  state 
and  local  taxation  has  played  a  sufficiently  important  part  in 
previous  discussions  of  tax  reform  to  justify  a  brief  consid- 
eration of  that  subject.  We  may  first  observe  that  the  plan 
we  propose  does  not  require  any  separation  whatever  of  the 
sources  of  state  and  local  revenue,  but  that  it  is  not  inconsis- 


43 

tent  with  the  adoption  of  a  thoroughgoing  scheme  of  separa- 
tion. Under  our  plan,  it  would  be  possible  for  many  states  to 
raise  from  the  personal  income  tax  a  sufficient  sum  to  defray 
the  entire  expense  of  the  state  government,  so  that  the  taxa- 
tion of  property  could  be  turned  over  wholly  to  the  local 
authorities ;  while  the  revenue  from  the  business  tax,  although 
collected  by  the  state,  could  either  be  retained  by  the  state  or 
distributed  to  the  local  governing  units.  We  refer  to  this  fact 
merely  to  emphasize  our  remark  that  the  plan  we  have  pro- 
posed will  neither  prevent  the  states  from  adopting  the  plan 
of  separation,  if  they  so  desire,  nor  compel  them  to  do  so,  if 
they  prefer  not  to  experiment  with  that  plan. 

The  committee  is  of  the  opinion  that  a  partial  separation  of 
the  sources  of  state  and  local  revenue  is  desirable,  but  that 
complete  separation,  by  cutting  the  connecting  cord  between 
the  state  and  local  governments,  tends  to  destroy  the  states' 
sense  of  responsibility  in  the  matter  of  local  taxation.  There 
is  no  experience  to  justify  the  belief  that,  if  the  states  turn 
over  to  the  local  governments  independent  sources  of  revenue^ 
and  adopt  the  theory  that  local  taxation  is  an  affair  of  purely 
local  interest,  we  shall  ever  have  a  satisfactory  administration 
of  the  tax  laws  by  local  officials.  Experience  abundantly  shows 
that  such  officials  need  constantly  the  expert  advice,  intelli- 
gent guidance,  and,  when  necessary,  the  effective  control  of  a 
state  tax  commission  composed  of  experts  and  keenly  alive  to 
the  need  of  just  and  efficient  administration  of  tax  laws  by 
local  officials.  Total  separation  of  the  sources  of  state  and 
local  revenue,  at  least  in  the  forms  in  which  it  is  usually  pre- 
sented, seems  to  the  committee  to  be  distinctly  a  backward 
step,  especially  at  this  moment  when  the  need  is  for  greater 
emphasis  upon  state  control  over  the  taxation  of  property  for 
local  purposes.  A  further  difficulty  of  complete  separation  is 
that  the  abolition  of  the  direct  state  tax  upon  property  tends 
to  remove  a  desirable  check  upon  state  expenditures. 

The  committee  believes,  however,  that  a  partial  separation 
of  the  sources  of  state  and  local  revenue  is  desirable.  The  in- 
heritance tax  is  obviously  a  proper  source  of  state  revenue. 
Taxes  upon  insurance  companies  and  upon  automobiles  may 
very  properly  be  allocated  to  the  state  rather  than  the  local 


44 

governments.  Under  special  conditions  it  may  be  better  that 
railroad  taxes  should  be  retained  in  the  treasury  of  the  state 
than  utilized  as  a  source  of  local  revenue.  From  the  taxes 
thus  enumerated,  it  is  obvious  that  states  can,  and  should,  de- 
rive revenues  that  are  independent  of  local  taxation ;  but  we 
believe  that  it  is  desirable  that  a  state  tax  on  property  should 
be  retained  as  the  regulator  of  the  state  finances  and  a  re- 
minder to  the  state  of  its  responsibility  for  the  proper  assess- 
ment of  property  in  every  locality  within  its  jurisdiction. 

We  have  recommended  that  a  part  of  the  personal  income 
tax,  corresponding  to  the  proportion  which  state  expenditures 
bear  to  the  total  of  state  and  local  expenditures,  be  allocated 
to  the  state  treasury.  Such  an  arrangement  will  tend  to 
lighten  the  direct  state  tax,  but  will  not  make  such  a  tax  un- 
necessary. We  have  pointed  out  that  the  distribution  of  the 
proceeds  of  the  proposed  business  tax  may  well  vary  from 
state  to  state.  We  here  suggest  that  whether  the  state  should 
be  assigned  a  share  may  well  depend  upon  the  comparative 
revenue  needs  of  the  state  and  the  local  governments.  If  the 
state  tax  is  light,  the  entire  revenue  from  the  business  tax 
may  well  be  assigned  to  the  local  political  units;  and  if  the 
state  tax  is  heavy,  it  would  follow  that  the  state  might  well 
retain  a  share  of  the  business  tax.  Here,  as  elsewhere,  the 
system  we  propose  permits  of  different  adjustments  to  suit 
the  varying  conditions  of  our  several  states. 

XI.   Amendment  of  State  Constitutions 

Section  41.  As  has  been  repeatedly  set  forth  in  the  publi- 
cations of  the  National  Tax  Association,  it  is  certain  that  no 
important  departures  from  the  system  of  the  general  property 
tax  are  possible  in  many  states  under  constitutional  restric- 
tions which  provide  that  taxation  must  be  uniform,  equal,  and 
proportional.  That  such  constitutional  limitations  have,  in 
fact,  tended  to  secure  neither  uniformity  nor  equality  in  taxa- 
tion, is  also  fully  set  forth  in  the  Proceedings  of  the  annual 
conferences  of  the  National  Tax  Association  and  in  various  re- 
ports of  special  committees.  Upon  this  subject  the  committee 
needs  only  to  say  that  in  states  which  are  now  limited  by  con- 
stitutional restrictions  prescribing  a.  uniform  rule  or  method 


45 

of  taxation,  no  satisfactory  adjustment  of  tax  problems  can  be 
reached  until  such  limitations  are  removed,  or  at  least  modi- 
fied. There  may  be  room  for  difference  of  opinion  concerning 
the  form  which  constitutional  amendments  should  take.  Some 
states  have  preferred  to  adopt  amendments  authorizing  spe- 
cific departures  from  the  uniform  rule,  while  others  have 
eliminated  wholly  the  requirement  of  uniformity.  The  com- 
mittee has  concluded  that  it  is  unnecessary  at  this  time  to  say 
more  than  that  the  plan  of  taxation  which  it  recommends  will 
require  no  more,  and  probably  no  less,  amendment  of  state 
constitutions  than  any  other  plan  adequate  to  the  needs  of 
the  case. 

Charles  J.  Bullock,  Chairman, 
Harvard  University 

Thomas  S.  Adams, 
Yale  University 

Charles  V.  Galloway, 

State  Tax  Commissioner  of  Oregon 

Samuel  T.  Howe, 

Kansas  Tax  Commission 

Celsus  P.  Link, 

Colorado  Tax  Commission 

Samuel  Lord, 
Minnesota  Tax  Commission 

Thomas  W.  Page, 

University  of  Virginia 

A.  C.  Rearick, 

Attorney  at  Law,  N.  Y.  City 

W.  L.  Tarbet, 

Illinois  Central  R.  R.  Co. 

Ski-it.  \'Hhi;.    1918. 


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